Strangely, the first casualty of the US government’s war on the Chinese semiconductor industry is an Israeli company Tower Semiconductor (TSEM).
The US Bureau of Industry and Security declared war on the Chinese tech industry with restrictions on the use and export of American integrated circuit technology and designs on 7 October 2022. Tower stock was trading at $46.70 on 15 August 2022. By 17 August 2023, Mr. Market paid $30.48 for TSEM.
Chinese authorities retaliated for this action by slowing the approval paperwork for Intel’s acquisition of Tower, Quartz speculates. Intel (INTC) terminated the acquisition “due to the inability to obtain in a timely manner the regulatory approvals required under the merger agreement,” a press release states.
Consequently, Intel will pay a $353 million termination fee to Tower. Yet, Tower has lost enormous value. Intel was planning to pay $5.4 billion for Tower. Yet, Tower had a $3.468 billion market cap on 17 August 2023.
What is Tower?
Tower Semiconductor Limited (NADSDQ: TSEM) operates semiconductor foundries or fabs.
A semiconductor foundry is a factory that manufactures silicon wafers. To explain, all the chips that run our electronic devices are silicon wafers. Hence, graphics processor units (GPUs) and semiconductors are silicon wafers.
Tower manufactures many processors including Radio Frequency (RF), High Performance Analog (HPA), integrated Power Management, CMOS Image Sensors (CIS), Non-Imaging Sensors (NIS), Mixed-Signal CMOS, and Micro-Electro-Mechanical Systems (MEMS).
Advanced semiconductors can have incredible value. For example, the Saudi Arabian government bought 3,000 NVIDIA H100 GPUs at $40,000 apiece, Business Insider India reports. Hence, I estimate the Saudi government spent $120 million for 3,000 GPUs.
Currently, Tower operates manufacturing facilities in Migdal Haemek, Israel, Newport Beach, California, San Antonio, Texas, and Japan. It is developing another facility in Italy in the European Union.
War between China and Taiwan could benefit Tower
Hence, Tower Semiconductor (TSEM) is one of the few semiconductor foundry operators with no facilities in Taiwan. Thus, Tower could profit from a war between the People’s Republic of China and Taiwan. To explain, Chinese leaders, including President Xi Jinping, regard Taiwan as part of the People’s Republic and the historic Chinese Empire.
However, Taiwan has a different political system (democracy) than China. Hence, most Taiwanese regard their island as an independent republic.
History makes the conflict worse because Taiwan is legally the Republic of China, the successor state to Chiang Kai-sek’s Nationalist gangster regime that lost the Chinese Civil War to the Communist Party. In 1949, Chiang and his followers fled to Taiwan, where the US Navy protected them from the People’s Liberation Army (PLA).
Cynics will say Chinese authorities wanted to prevent Intel from owning foundries outside Taiwan. The Economist estimates Taiwanese foundries produce 60% of the world’s semiconductors and 90% of the advanced semiconductors in March 2023. Hence, occupying Taiwan could give Beijing control of the semiconductor and tech industry.
A Taiwan-China War could boost Tower because combat could destroy semiconductor plants or disrupt chip manufacturing. Tower could benefit because its foundries are in Israel, Texas, California, and Israel.
Notably, the largest chip maker, the Taiwan Semiconductor Manufacturing Company (TSMC), is having difficulty developing a semiconductor foundry in Phoenix, Arizona. TSMC is having trouble finding skilled workers in the US, Business Insider reports. Thus, the plant is delayed until 2025.
Hence, the company visas so 500 Taiwanese workers can move to Arizona. Conversely, a union, the Arizona Pipe Trades 469. opposes the deal. In contrast, Tower (TSEM) has two US semiconductor foundries up and running.
Is Tower Semiconductor (TSEM) a value investment?
Thus, many people will wonder if Tower Semiconductor (TSEM) is a value investment because it could manufacture semiconductors outside Taiwan? Tellingly, Tower’s share is cheap. Mr. Market paid $30.12 for TSEM on 16 August 2023.
Conversely, Tower makes almost no money. For example, it reported a quarterly income of $50.53 million, quarterly revenues of $357.19 million, and a quarterly gross profit of $86.52 million on 30 June 2023.
Plus, Tower is shrinking. For example, Tower’s quarterly revenues fell from $426.17 million on 30 June 2022. Similarly, the quarterly gross profit fell from $112.44 million and the quarterly operating income fell from $70.67 million on 30 June 2022.
Consequently, Tower has double-digit quarterly revenue shrinkage. For example, Tower’s revenues shrank by -16.19% in the quarter ending on 30 June 2023. The revenue growth rate fell from -15.56% in the quarter ending on 31 March 2023.
Interestingly, Tower can achieve high rates of revenue growth. For example, Tower’s revenues grew by 17.68% in the quarter ending on 30 June 2022.
Thus, Tower is a cheap company that makes some money. Moreover, Tower is capable of high revenue growth.
Tower Generates Little Cash
Tower Semiconductor (TSEM) generates cash. For example, Tower reported a quarterly operating cash flow of $75.49 million on 30 June 2023.
Yet, Tower can generate far more cash. It reported a quarterly operating cash flow of $529.82 million on 31 December 2022. Conversely, Tower reported a quarterly ending cash flow of $13.26 million on 30 June 2023. The quarterly ending cash flow fell from $304.93 million on 31 March 2023 and $340.76 million on December 2022.
Tower had $913.60 million on cash and short-term investments on 30 June 2023. The cash and short-term investments fell from $1.00581 billion on 31 December 2022 and rose from $855.96 million on 30 June 2022.
Conversely, NVIDIA (NVDA) had $15.32 billion in cash and short-term investments on 30 April 2023. Thus, GPU designers and developers are more lucrative companies than foundry operators.
Tower Offers Little Value
I think Tower (TSEM) offers little value because it had $2.53408 billion in total assets on 30 June 2023. Therefore, I consider Tower overpriced at the $30.48 Mr. Market paid for it on 17 August 2023.
I think the only value Tower offers is as an acquisition target. I suspect a tech company in search of semiconductor manufacturing facilities outside Taiwan will buy Tower. Potential buyers for Tower include NVIDIA (NVIDA), Apple (AAPL), Tesla Motors (TSLA), TSMC, and Chinese technology giants such as Huawei, Yangtze Memory Technologies, HiSilicon, and GigaDevice.
I think Tesla is a probable buyer for Tower because it is manufacturing its own silicon carbide chips. Elon Musk will need chips because of his plans to manufacture self-driving vehicles and humanoid robots.
NVIDIA or Apple could buy Tower to get control of their supply chains. Chinese companies and TSMC could want semiconductor foundries away from China and Taiwan.
Finally, I recommend investors avoid Tower Semiconductor (TSEM) because I think it offers little value. I consider NVIDIA (NVDA) the only chip maker worth owning.