Key Points
Tower is making a major investment to increase capacity.
The company received a sizeable grant from the Government of Japan.
The stock isn't cheap, but the future is bright.
Shares of Tower Semiconductor(NASDAQ: TSEM) rallied on Tuesday, jumping as much as 19%. As of 11:46 a.m. ET, the stock was still up 15.9%.
The catalyst that sent the semiconductor foundry higher was a move to increase capacity to meet soaring demand.
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Major expansion plans
In a press release that dropped on Tuesday, Tower Semiconductor announced that it will invest $3 billion, alongside a $1 billion grant from the Government of Japan, to expand its chipmaking capacity in the country. To that end, the company will conduct a dual-track expansion plan to significantly increase its production capacity for 300mm silicon photonics, silicon germanium, and advanced optical packaging.
"The expansion is designed to support the rapidly growing long-term customer demand, substantially increasing the company's manufacturing capacity and extending its technology leadership," management said in a statement.
The first track will repurpose an existing facility, significantly increasing its 300mm silicon photonics capacity, which is expected to come online in Q4. The second track will focus on the construction of an additional 300mm manufacturing facility, providing a "multifold increase" in capacity.
Management also raised its 2028 outlook, targeting revenue of $3.6 billion and net profit of $1.2 billion.
Demand remains high for Tower Semiconductor's silicon photonics technology, which helps improve networking and speed data transfer between processors using light rather than copper cable. As AI adoption continues and the focus increasingly turns to energy efficiency, data centers are upgrading their systems, ditching the legacy copper and switching to silicon photonics.
To be clear, Tower stock is dearly priced, selling for 46 times this year's expected earnings. However, management is taking all the right steps to position the company for the future.
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Danny Vena, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
