On Thursday, Susquehanna initiated coverage on Tower Semiconductor (NASDAQ:TSEM), a player in the specialty foundries market, with a Neutral rating and a price target of $36.00. The firm's analysis includes Tower Semiconductor in its broader research of the Foundry sector, which is notably led by TSMC, but also includes Global Foundries and Soitec.
The firm acknowledges that specialty foundries represent only a small segment of the overall market and that there is a general lack of clarity regarding the growth rate in this sector. This is partly due to China's aggressive expansion in bulk silicon semiconductor manufacturing, which was evidenced by Applied Materials (NASDAQ:AMAT)' recent earnings report showing that China contributed to 45% of its total revenues.
Despite the current market imbalances, Susquehanna sees a strong future for specialty substrates such as SOI, SiGe, and SiPho, which are seeing increased utilization in key growth areas. The firm points out that while there is an excess supply of SiC wafers, particularly from China, the complexity of producing specialty substrates like SOI or SiPho means there are fewer manufacturers capable of scaling production to meet the demands of growing end markets.
Susquehanna anticipates potential revenue growth acceleration for Tower Semiconductor into 2025 as the usage of key substrates per device increases and new applications emerge. However, they maintain a cautious stance due to the current lack of visibility on the adoption rate of these technologies.
The price target of $36.00 is set at approximately 14 times the projected CY25 earnings per share (EPS), which is above the past ten-year average forward price-to-earnings (PE) ratio of 12 times. Susquehanna's Neutral rating reflects the current risk/reward profile, with the expectation that the semiconductor cycle will hit a bottom by mid-2024 as inventory corrections conclude, though the firm notes the uncertainty in how secular trends might drive EPS growth for Tower Semiconductor.
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