Mizuho bullish on Tower Semiconductor, points to AI optical growth

Mizuho has initiated coverage of Tower Semiconductor with an Outperform rating and a price target of $300 per share, highlighting the company's position as the leading and fastest-growing contract manufacturer of silicon photonics chips. These chips play a crucial role in optical connections between AI data center servers and are essential for expanding data center bandwidth, fueling the AI data center revolution over the next decade.

According to Mizuho, the market for manufacturing silicon photonics chips is expected to surge from $1.3 billion in 2025 to $8.5 billion by 2029, with a compound annual growth rate of 60%. Tower Semiconductor's revenue in this sector is projected to grow even faster, at approximately 76% annually, reaching about $3.8 billion by 2029.

Tower's heterogeneous packaging technology, a result of its 2008 merger with Jazz Semiconductor, gives it a dominant market share in SiPho pluggable optical connectivity. The analyst foresees Tower holding over 40% of the market by 2026. Mizuho expects Tower's total revenue to expand at a rate of 33% per year to $4.9 billion by 2029, surpassing consensus estimates of $4.5 billion.

The company anticipates a significant increase in gross margin, rising from around 23% to 50%, and a compound growth in earnings per share, reaching approximately $16.51 by 2029. Moreover, Mizuho expects free cash flow to reach about $1.8 billion during the same period.