Tower Semiconductor (NASDAQ: TSEM) saw its shares soar 11.24% to close at $255.49 on Tuesday, as the chipmaker unveiled plans to expand capacity in Japan with $1 billion in government backing. The company also raised its 2028 net profit target to $1.2 billion, a 60% increase from the prior goal of $750 million, signaling confidence in its growth trajectory.
The rally came amid a broader rebound in chip stocks, though the sector has yet to fully recover from recent losses. The PHLX Semiconductor Index (SOX) rose 2.54%, or 314.15 points, to 12,661.93, recouping about half of Monday's 619.38-point drop. Still, the index remains 2.35% below its close on Friday, as investors weigh the impact of lighter-than-expected U.S. inflation data and lingering uncertainties.
Despite the jump in Tower's shares, the new profit target is more than five times the stock's move, making the shares appear cheaper on a forward basis. The company's equity value ended Tuesday at approximately $28.6 billion, up $2.9 billion from Monday. That increase is nearly triple the size of the Japanese grant and about 6.4 times the expected $450 million boost in 2028 profit, suggesting investors are pricing in both the margin reset and reduced funding stress.
Tower's updated financial model reveals significant margin expansion. The company now expects 2028 revenue of $3.60 billion, up 28.6% from its previous $2.80 billion target. Net profit is projected at $1.20 billion versus $750 million, implying a net margin of 33.3%, compared to 26.8% earlier. The implied equity value-to-target net profit ratio has dropped from 34.2 times to 23.8 times, a 30.5% reduction, based on the same share count.
The expansion plan involves converting Tower's Arai site to 300-millimeter silicon-photonics manufacturing, with full conversion expected by the fourth quarter of 2027. This technology uses light to transfer data between chips, offering higher efficiency for AI data center applications. Additionally, the company plans to build a new plant adjacent to Fab 7 to boost optical link output for AI data center customers.
CEO Russell Ellwanger highlighted that the second track provides 'the path for continued growth far beyond 2028.' However, the current valuation hinges largely on the first track, as Tower tied its new 2028 model to the Japan expansion. The new fab is expected to contribute to earnings starting in 2029, according to Reuters.
The company's projections are based on a three-year forecast rather than actual booked earnings, and Tower flagged risks including weaker demand, construction delays, stringent grant conditions, and low factory utilization that could hurt profits. The next steps also depend on completing related agreements.
Meanwhile, the broader chip sector remains under scrutiny. Taiwan Semiconductor Manufacturing Co (TSM) is set to report second-quarter earnings on Thursday, with analysts expecting a 59% profit jump to a record T$632.6 billion. However, TSMC's ADR has fallen 3.16% since Friday, as traders focus on capital spending and capacity comments rather than bullish headlines. Micron (MU) and Nvidia (NVDA) have returned to their Friday closing levels, but TSMC still trades below that mark.
Market moves remain selective, with investors betting on specific earnings outcomes rather than a broad sector recovery. The SOX has dropped over 11% from its June peak as of Monday, and short interest in major chip stocks has hit a three-year high. 'We've never seen this kind of extreme earnings growth,' said Steve Sosnick, chief market analyst at Interactive Brokers (IBKR). Alexander Lis, chief investment officer at SD Ventures, noted that recent price targets are 'a consequence of the incredible momentum in semis rather than a reliable indicator of future performance.'
