It was no surprise that Intel (INTC +4.85%) had to walk away from its bid to acquire Israel's chip manufacturer Tower Semiconductor (TSEM +5.74%). The clock was ticking, and regulators in China were in no hurry to approve the tie-up.
Just a couple weeks after the acquisition termination, though, Intel and Tower announced a different kind of partnership: Tower will utilize an Intel fab in New Mexico to expand production for Tower customers. Does this new information make Tower stock a buy now?
NASDAQ: TSEM
Key Data Points
Tower's bet on Intel U.S. manufacturing
As for the details of this deal, Tower will be investing approximately $300 million into Intel's fab (a factory that makes chips) outside of Albuquerque, New Mexico. Intel calls this fab its "Innovation Hub" and had previously announced a $3.5 billion investment in 2021 to expand its New Mexico facility's capabilities in advanced chip packaging. Intel calls its packaging tech Foveros -- the process of cutting chips from silicon wafers, which then get assembled into computing and other electronic systems. Intel's expansion was slated for completion sometime in 2023.
It's clear what Intel gets from this deal. It has been embarking on an ambitious chip fab expansion roadmap, including expansion at its facilities in Oregon and Arizona and brand new mega-fab complexes in Ohio and Germany (with ample government funding and tax credit help from the U.S. CHIPS Act and European Chips Act). Tower's $300 million contribution is modest, but it's still helpful as Intel burns through chunks of its own cash balance (as measured by negative free cash flow).
Data by YCharts.
What does Tower get? For one thing, Tower sees long-term growth among its customers that rely on it for specialty analog chips (power management, radio frequency, and other sensors aimed at smartphones and automakers). Spending $300 million to buy equipment is far cheaper than the billions of dollars it would take to build a new fab or even expand an existing one.
Plus, Intel's New Mexico facility will crank out advanced 300mm (12-inch) wafers using Tower's existing manufacturing process technology. Tower's existing facilities are as follows:
- One 150mm fab and one 200mm fab located in Migdal Haemek, Israel
- Two 200mm fabs in Newport Beach, California and San Antonio, Texas
- Two 200mm fabs and one 300mm fab through a joint partnership with Panasonic Semiconductor in Japan
Striking an asset-light deal with Intel looks like a profitable way for Tower to expand in the U.S. alongside the growing needs of its customers. This helps protect Tower's free cash flow from dipping too far into the red and sustains its fortress balance sheet.
Data by YCharts.
Time to buy Tower stock?
Because it was still under merger agreements with Intel at the time, Tower did not provide any financial guidance during its Q2 2023 earnings update. But the company has been hit hard this year by the same downturn in semiconductor sales (especially from flagging smartphone and PC sales) that Intel has been hit with. Tower Q2 revenue was down 16% year over year to $357 million.
However, other semiconductor manufacturers have been indicating demand is starting to bottom, and sales are heating back up in the second half of 2023. A fully-fledged upcycle for chips could be well underway in 2024 and 2025. Perhaps that will be Tower's message when investors get commentary again from management during its third-quarter update this autumn.
For now, the stock trades for less than 11 times trailing-12-month earnings per share, or 55 times trailing-12-month free cash flow -- the latter metric elevated because quarterly free cash flow dipped into negative territory early in 2023.
If growth is about to return for Tower, shares could be mighty cheap right now. I'm on hold until I hear an update from management, but I'm watching this semiconductor stock closely right now.
