Shares of Tower Semiconductor Ltd. (NASDAQ:TSEM) experienced a decline amid a rating adjustment by Wedbush Securities, which shifted its rating on the Israeli semiconductor company from outperform to neutral. The firm's decision, announced in a note issued Wednesday, signals a more cautious outlook on the stock despite recognizing the underlying strengths of Tower Semiconductor’s business, particularly in the silicon photonics arena.
Matt Bryson, the hardware and semiconductor analyst responsible for the rating update, highlighted that the company is contending with headwinds stemming from elevated costs for key components, notably memory chips. This increase in component prices may dampen revenue growth within Tower’s mobile segment, which accounts for approximately 25% of the company’s sales. In this context, the downgrade reflects concerns that persistent high input costs could constrict profit margins and constrain top-line performance in this significant business area.
Nevertheless, Wedbush continues to endorse the long-term technological narrative behind Tower Semiconductor’s silicon photonics (SiPh) initiatives. The company maintains a leading position in the SiPh foundry market, a sector poised for expansion driven by demand related to networking infrastructure and data center developments. Recent industry reports have underscored shortages of indium phosphide (InP), a material commonly used in conventional optical components. This scarcity could accelerate adoption of SiPh solutions, which rely less heavily on InP, potentially benefiting Tower’s product offerings.
Wedbush also proposes that Tower Semiconductor might exceed expectations for SiPh revenue growth, potentially achieving faster ramp-up than the roughly two-year timeline integrated into current forecast models. Strong ordering activity and installation schedules for equipment installations support this more optimistic view. Management has confirmed that recent capacity expansions are fully backed by customer orders and hinted at the possibility of further capacity additions. However, due to a lack of detailed visibility into future orders, Wedbush has refrained from quantifying additional upside potential at this time.
Valuation concerns remain a core rationale for the rating adjustment. Wedbush currently values Tower Semiconductor at about 25 times projected earnings for 2027, a premium compared with peers like Taiwan Semiconductor Manufacturing Company (TSMC) and GlobalFoundries. This valuation implicitly assumes that existing earnings forecasts may be somewhat conservative. Even when adopting a more optimistic stance—assuming earnings per share of approximately $6 in 2027—a conservative multiple of 20 times earnings would still place the equity valuation close to the current trading price and the previously stated price target, thus limiting significant upward price movement.
Following the rating revision, Tower Semiconductor’s shares saw a decline of 2.53%, trading near $117.58 according to real-time market data at the time of the report. This price reaction reflects investor reassessment of the stock’s growth potential and valuation in light of Wedbush’s measurement of risk and reward.
In summary, while Tower Semiconductor continues to demonstrate technological leadership and anticipates robust demand in silicon photonics, the company faces challenges from high component prices affecting a substantial portion of its revenue, alongside valuation metrics that suggest scope for limited share price appreciation. Investors and market observers will likely monitor cost dynamics and order visibility closely to reassess growth prospects going forward.