Bank of America: Tower Semiconductor orders extend to 2029, while competition and depreciation weigh on earnings outlook

What changed in orders and capacity?

Tower Semiconductor’s third-quarter results exceeded expectations, and its fourth-quarter guidance was above market consensus; long-term agreements with major customers have been extended to 2029. BofA believes the company is well positioned in pluggable silicon photonics modules and near-packaged optics, with demand still significantly exceeding supply.
The first silicon photonics expansion line is progressing ahead of schedule, with full production targeted for the third quarter of 2027. The company also plans to announce further expansion plans soon for its two existing 200-millimeter silicon photonics fabs. Longer order horizons and increased capacity together support delivery growth over the coming years.

Tower is developing near-packaged optics (NPO) prototypes with more than 10 customers and expects to ship a substantial number of related wafers in the second half of 2027. BofA sees growing demand for data-center optical connectivity and the company’s position in silicon photonics integrated circuits as the foundation for its growth.
NPO could also boost the silicon-germanium business: most solutions will replace digital signal processors with silicon-germanium transimpedance amplifiers and drivers. Silicon photonics wafers with integrated lasers could further expand the company’s market opportunity because of their higher selling prices.

BofA lowered its revenue forecasts for 2026–2028 by 1.0%, 5.2% and 3.3%, respectively, to 2.014 billion, 2.861 billion and 3.883 billion dollars. Revenue is forecast to grow 42.1% year over year in 2027, below the previous forecast of 48.4%.
By business, BofA cut its 2027 revenue forecast for RF infrastructure by 1.9%, while lowering its forecasts for RF mobile and sensors and displays by 27.8% and 18.3%, respectively. Outside silicon photonics-related growth, downward revisions to other businesses also affected overall revenue.
After adjusting its margin assumptions, BofA cut its 2028 EBITDA forecast by 6.2% to 1.968 billion dollars. The bank believes competitors will progressively add silicon photonics capacity by 2028, and low-price competition for orders could limit price increases, while rising depreciation will also pressure margins.

Margins on incremental third-quarter revenue benefited from product mix and timing; management reiterated its incremental margin range of 55%–58%. BofA is also watching depreciation from new capacity and the impact of competition on pricing.
BofA still believes the company could exceed its 2028 target model and maintains a Buy rating. However, citing uncertainty over AI industry capital spending, the bank lowered its price target from 367 dollars to 310 dollars and reduced its valuation basis from 20 times to 18 times estimated 2028 EV/EBITDA.
The company did not update its progress on co-packaged optics (CPO) development this time; BofA believes the technology could still affect Tower’s market share.