Company Overview: Tower Semiconductor Ltd. (NASDAQ: TSEM) is engaged in providing manufacturing services of semiconductor integrated circuits on silicon wafers. The company offers Integrated Circuit (IC) design, turnkey and manufacturing services, utilizing innovative production facilities and the proprietary IC designs of their customers.

TSEM Details

TSEM Rides on Impressive Performance in the First Quarter of Fiscal 2021: Tower Semiconductor Ltd. (NASDAQ: TSEM) is involved in offering technology and manufacturing platforms for integrated circuits (ICs) in markets such as industrial, consumer, automotive, infrastructure, mobile, medical, and aerospace and defense. The semiconductor space is witnessing massive growth, thanks to the impetus in high-performance computing (HPC) applications, wearables, gaming, drones, virtual reality, and augmented reality devices due to the coronavirus crisis. Furthermore, enhancements in DRAM and NAND pricing perform as tailwinds for semiconductor stocks accommodating to the memory market. Leveraging these opportunities, TSEM remains on track to implement its capacity expansion plan, which was announced in February 2021. The plan was motivated by elevated customers’ demand which surpassed the current 200mm and 300mm capacity. In 1QFY21, the company announced purchase orders of $150 million to grow its wafer capacity. TSEM expects incremental capacity from this equipment to be fruitful in 2HFY21. Further, the company anticipates achieving full qualification from this equipment within 1QFY22.

It is worth mentioning that Standard & Poor’s Ma’alot (an Israeli rating company that S&P Global Ratings fully own) reiterated TSEM’s rating of “ilAA- “ , with a stable horizon in May this year. Coming to the company’s first-quarter performance, TSEM reported earnings of 26 cents per share, which increased from 16 cents reported in the prior corresponding period. In 1QFY21, revenues stood at ~$347 million, depicting a rise of 16% on pcp. Organic revenue during the quarter increased a whopping 21% on a year over year basis. Gross profit in 1QFY21 came in at $70 million, up 33% on pcp. In 1QFY21, operating income came in at $32 million, up from $16 million reported in 1QFY20. Net profit for the period came in at $28 million as compared to $17 million in 1QFY20.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Key Update: On 6 May 2021, the company informed the market that AIStorm’s latest AI-in-Imager solutions would be utilizing TSEM’s Hi-K VIA capacitor memory as a substitute of digital calculations. The move will perform artificial intelligence computation at the pixel level and enable high-density imager technology of “always on” functionality. 

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter with a cash balance (which includes cash and cash equivalents, short-term deposits, and marketable securities) of $709.9 million. Long-term debt stood at $241.6 million as of 31 March 2021. Notably, TSEM repaid $29 million of its debt at the end of 1QFY21. The company generated $87 million from cash flow from operating activities during the period, with an investment in net fixed assets of $49 million.

In 1QFY21, gross, EBITDA, operating, and net margins stood at 20.1%, 27.2%, 9.4%, and 8.8%, higher than year-ago figures of 17.5%, 24.4%, 5.5%, and 5.3%, respectively. In 1QFY21, the current ratio stood at 4.02x, higher than the industry median of 3.38x. The company’s debt to equity ratio stood at 0.23x in 1QFY21, lower than the industry median of 0.32x.

Profitability and Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 32.71% of the total shareholdings, while the top 4 constitutes the maximum holding. Wellington Management Company, LLP, and Senvest Management, LLC are holding a maximum stake in the company at 8.79% and 7.12%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: On the flip side, higher research, and development expenditure may have a denting effect on the company’s margins. Also, stiff competition from peers adds to the woes. Further, a decline in demand of consumer’s end market and their spending power, owing to unfavorable economic conditions may impact TSEM’s business and results of operations. Also, the loss of current key customers may adversely affect the business and profitability of the company.

Outlook: For FY21, the company remains optimistic regarding its broad range of foundry platforms with advanced analog technology diversity, and enhanced customer partnerships with analog industry leaders. The company anticipated 2QFY21 revenues to be ~$360 million (+/- 5%), depicting the company’s highest quarterly revenue in its history. Further, the mid-range revenue outlook represents an organic growth of 26% and 16% total growth on a year over year basis. Looking forward, strong growth in sales, lower costs, improved technologies, increased customer’s demand, and portfolio optimization are likely to act as growth catalysts.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went down by ~6.1%. The stock made a 52-week low and high of $17.61 and $34.45, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight discount compared to its peer’s average, considering higher expenditure, stiff competition from peers, and decline in consumer’s end market demand and spending power. We have taken peers like NVIDIA Corp (NASDAQ: NVDA), Advanced Micro Devices Inc (NASDAQ: AMD), to name a few.  Considering the company’s decent 1QFY21 performance, geographical expansion, increase in purchase orders, encouraging outlook, current trading levels, and valuation, we give a “Buy” recommendation on the stock at the closing price of $28.17, up by ~2.14% on 14 June 2021.  

TSEM Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.