Tower Semiconductor: You Can Have Your Cake And Eat It Too

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Overbet For Value


  • Tower Semiconductor's new business model is more attractive than that of any of the major foundries.
  • The company's joint venture with Panasonic, as well as its potential to acquire closed or underperforming fabs at very low prices creates triple-digit incremental ROIC.
  • Tower Semiconductor shares can rise by over 200% during the next few years, as the market seems to not understand the drastic incremental ROIC the firm may achieve going forward.

A semiconductor fabrication plant (also known as a fab) is where integrated circuits are built. Since its beginnings several decades ago, this industry has remained capital-intensive and risky in nature. The modern fab takes billions of dollars (and sometimes tens of billions) to build, and at least two years from the time a shovel hits the ground to the first wafer being produced from this new facility. Despite the large cash and time investment, there are far from any guarantees of success. Technology can change quickly, and the market can change even faster. Building a new fab is one of the easiest ways for a semiconductor company to go bankrupt. The history of the industry is scattered with the carcasses of victims in Japan, the United States and all over the world that fell to Intel (NASDAQ: INTC), Taiwan Semiconductor (NYSE: TSM), Samsung (OTCPK:SSNLF), Micron (NASDAQ: MU), Toshiba (OTCPK:TOSBF) and the modern fab giants.

There are two main types of fab owners. There are foundries like Taiwan Semiconductor that receive business from fabless semiconductor companies. Fabless semiconductor companies design chips using sophisticated software and send those "chip blueprints" to a foundry like Taiwan Semiconductor to manufacture for them. There are fab owners like Intel, who take control of the entire semiconductor design, manufacturing process and sale of the finished chip. Samsung is sandwiched in the middle in this paradigm, as it receives business from fabless semiconductor companies, while also designing and manufacturing chips of its own.

The basic foundry business model is quite simple. The most common way to get capital for a project is to issue debt. After acquiring financing, the foundry must build a very expensive state-of-the-art fab. I'll use the current Samsung fab that is slated to produce its first wafers in 2017 as a reference point. This

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I will share some of my investment ideas here.

Disclosure: I am/we are long TSEM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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