Is tripling in a year still considered cheap? Bank of America has a bullish outlook on Tower Semiconductor (TSEM.US): the real profit in AI comes from "data transfer" chips.

Bank of America Securities has initiated coverage on Tower Semiconductor (TSEM.US), a leading semiconductor manufacturer and foundry headquartered in Israel, giving it a Buy rating and setting a target price of $367. Just days before Bank of America issued this bullish rating, Tower Semiconductor reported its best quarterly earnings in company history. Although its stock price has already doubled (tripled) over the past year, the new Buy rating at this level has still drawn widespread attention. What makes this investment particularly appealing is Bank of Americas anticipated source of growth: not the chips running AI models, but rather the chips that transmit data between these chips. This distinction is at the core of the entire bullish logic and explains why Bank of America analysts believe this highly sought-after stock still has significant upside potential. Tower Semiconductor: Positioned to Ride the AI Data Wave Tower Semiconductor is a specialty foundry based in Migdal Haemek, Israel. The company manufactures chips designed by other companies, focusing on analog and mixed-signal components rather than cutting-edge processors that often dominate headlines. Bank of America analyst Oliver Huang used a 20x multiple of Tower Semiconductor's projected enterprise value (EV/EBITDA) for 2028 to set the $367 target price. The banks earnings expectations for 2027 and 2028 are 13% and 28% higher, respectively, than the consensus on Wall Street. The analysts believe that the market has not yet priced in the rapid growth of one of Tower Semiconductors business segments. Tower Semiconductor holds a leading market share in the silicon photonics chip sector, which is used in transceivers for transmitting data within AI data centers. Bank of America expects Tower Semiconductors silicon photonics revenue to double by 2026, with this growth trend continuing through 2027 and beyond. Silicon Photonics Chips Are Critical for AI Data Centers Silicon photonics technology uses light instead of electrical signals to transmit data. Within data centers, this means faster connection speeds between servers with lower power consumption. AI systems require data transmission between thousands of chips. In large-scale applications, copper connections become inadequate, which is why fiber optic connections are gradually taking over this role. This is often the part that investors overlook: processors handle computation, while optical devices handle data transmission, and Tower Semiconductor produces precisely these optical devices. This positioning has led Bank of America to believe that Tower Semiconductor can benefit from AI spending without having to directly compete with NVIDIA Corporation and its rivals. Demand is already reflected in the data: In the second quarter of 2026, silicon photonics business revenue grew more than 270% year-on-year; its annualized run rate has surpassed $680 million. Tower Semiconductor expects this run rate to exceed $1 billion by the fourth quarter of 2026. Tower Semiconductors record quarterly performance supports the target price. Bank of Americas rating is built on a strong earnings report. Tower Semiconductor announced its record second-quarter results on August 4. Revenue reached $460 million, up 24% year-on-year. Net income surged to $91 million, a 95% increase compared to the same period in 2025. The gross margin hit 30%, a new record for the company. Tower Semiconductor also raised its third-quarter revenue guidance to approximately $520 million, continuing its growth momentum. Management has elevated its 2028 targets to $3.6 billion in revenue and $1.2 billion in net income. CEO Russell Ellwanger stated that these figures are already supported by customer order fulfillment. This performance provides Bank of America with the financial basis to set an aggressive target price for this stock, which has already seen substantial gains. Tower Semiconductors Expansion Plans in Japan Tower Semiconductor is making significant investments to expand its production capacity, with Japan at the core of this plan. In July, the company confirmed it had announced a dual-track expansion plan for its 300mm silicon photonics and packaging business. The project is expected to cost around $3 billion, with the Japanese government providing approximately $1 billion in subsidies, while the remaining amount will be covered by Tower Semiconductor itself.