The deal with Intel was cancelled, and the stock of the chip company Tower soared

Almost three years ago, in February 2022, the American chip giant announced Intel on purchase Tower Israeli according to a value of 5.4 billion dollars, a deal that was finally canceled in the summer of 2023, after the companies did not obtain the required regulatory approvals from the Chinese regulator on time. The purchase was supposed to be made at a price of $53 per Tower share, which was a 60% premium on the day the deal was announced.

A few months after the cancellation of the deal, Tower shares fell to a low of only about 22 dollars. However, since then the stock has recovered and today is approaching the price of $53, according to which it was supposed to be purchased. As of today, Tower is trading at a value of 5.7 billion dollars (a record of over 2 decades), after the stock jumped by almost 70% during 2024 (after losing 30% in 2023 due to the cancellation of the sale to Intel). Summing up the last three years, the stock has risen by about 25%.

With the wisdom of hindsight, and against the background of Intel’s troubles in recent months, it seems that in the end the cancellation was in favor of Tower, which continues as an independent company under long-time CEO Russell Ellwanger. In an interview with Globes last March, Ellwanger told how he felt when the Intel deal was canceled: “I’m not saying it’s good That the deal didn’t happen, but it wasn’t a big slap in the face. We now have capacity (production capacity), of course there are points to improve, and it was a good experience overall.”

And what’s more: the analog chips manufacturer from Migdal Ha’emek did not come out of that deal empty-handed – the agreement between the companies stated that Intel would pay Tower compensation for canceling the deal, in the amount of 353 million dollars that flowed into its coffers. Tower recognized the amount of the compensation in the reports of the third quarter of 2023, when it affected its net profit after tax deduction by 290 million dollars.

On the other hand, the intended seller Intel ran into difficulties in 2024, and the CEO who led the deal, Pat Gelsinger, recently retired after 4 years in the job. Intel sought to acquire Tower because it turned to the foundry’s strategy – manufacturing chips for third parties as well and not only for itself, And Tower was supposed to be a fundamental part of the strategy. The strategy did not take off and Intel laid off thousands of workers around the world, including in Israel, in 2024. When Tower’s stock soared, Intel’s stock fell by about 60%.

Outperformed the Global Chip Index

The index of Philadelphia’s chip stocks rose by about 13% in the past year, so Tower presented significant overperformance also in relation to this index. The return of the global sector was affected by contrasting factors – on the one hand, chip giant Nvidia continued to climb thanks to the artificial intelligence (AI) hype, and Broadcom and other stocks also showed impressive positive returns last year. On the other hand, concerns have arisen regarding the export restrictions to China and filling issues in some companies.

Analysts who cover Tower are positive about the stock, and according to Yahoo Finance data, their average target price is $57.5, a premium of about 13% over the stock’s current price on the Nasdaq. Tower is also traded on the Tel Aviv Stock Exchange at the same time.

At Oppenheimer, the target price for Tower shares is $60, a premium of about 18%, and the recommendation is “excess yield”. Last month, Sergey Veschanok and Avivit Mena Kalil of Oppenheimer published an update from a meeting with the Tower management, and noted that they expect an acceleration in the company’s growth in 2025, in light of demand for RF-SiPho chips for the optical communication market in data centers, at the same time as a recovery in areas that exhibited cyclical weakness in the past year, and increasing market shares.

Over the past few years, Tower has worked to expand its production capacity, and after the cancellation of the sale to Intel, it signed an agreement with Intel to use the Intel plant in New Mexico for the production of 300 mm chips. At the same time, it has a new production plant in Italy, about which Oppenheimer wrote that the start of production there is expected oppress the gross profit margins in the short term, but on the other hand will provide a new growth engine for the coming years and accelerate future growth and profitability rates.

“The potential to increase production is not yet priced in the stock”

In their estimation, the plant will reach full capacity towards the end of 2025. “In our estimation, this potential has not yet been fully reflected in the expectations of investors and in the pricing of Tower’s stock, which is still trading at a deep discount to the chip industry average,” Vaschunok and Mena Kalil wrote at the time. They added that Tower will end 2024 with a revenue level similar to the previous year, outperforming compared to a high single-digit decline in the analog chips market and a double-digit decline in some of its major competitors. This, against the background of the demand for RF-SiPho chips whose sales have jumped 3 times and are expected to continue growing in 2025.

Moreover, according to them, Tower is also expected to benefit from the cyclical recovery in the market: “The other business segments are expected to recover in the coming year. The demand for Power Management chips intended for the industrial and automotive markets is expected to show a recovery from a low level in the coming year, and at the same time, Tower is expected to increase its market share in light of the launch of products for the management segment Low voltage,” wrote Boffenheimer.

According to analysts’ forecasts, Tower will record revenues of $1.44 billion in 2024 reports, a slight increase compared to $1.42 billion in 2023. Growth is expected to accelerate during 2025 so that, according to the analyst consensus, it will end with revenues of 1.57 billion dollars, a growth rate of 9%.

In the first three quarters of 2024, Tower’s revenues decreased by 2% to approximately 1.05 billion dollars (of which 371 million dollars in the third quarter – growth of 3.4% from the corresponding period) and the net profit amounted to approximately 153 million dollars. In the third quarter, the company generated approximately $125 million from current operations, a decrease compared to the corresponding period in which Tower recognized the compensation receipts from Intel.