It's been a few months since Intel had to terminate its acquisition of contract chip manufacturer Tower Semiconductor (TSEM 1.93%), but Tower is wasting no time charting its path forward. It recently unveiled its long-term financial targets based on new investments it has made to expand its manufacturing capacity. The only problem is Tower and its customers remain in a deep downturn.

As I stated at the end of September, I was anxious to see Tower's first quarterly earnings update before deciding to buy (the first in two years, since Tower stopped reporting during the Intel tie-up talks, as is customary during acquisitions). After seeing the outlook for the final quarter of 2023, it's clear to me Tower is still on the struggle bus, but things might be improving soon.

Tower is unconcerned about short-term weakness

Tower is a smaller semiconductor contract manufacturer based in Israel. It has lots of customers, especially for analog chips (which interact with a physical world signal, like radio frequencies, electric currents, or magnetic fields) and sensors (lights, sound waves, etc.).

A pie chart showing Tower's revenue breakdown in Q3 2023, with nearly half coming from radio frequency chips and infrastructure uses in smartphones and wireless infrastructure, and 17% from automotive.

Image source: Tower Semiconductor, RF = radio frequency

After a stellar run of growth in the wake of the pandemic, Tower and its customers are now in a sizable downturn. Starting the second half of 2022, consumer demand for PCs and smartphones fell off a cliff. That market is now stabilizing, but just in time for industrial markets, including automotive chips, to enter their own downturn. The good news: Tower remains profitable.

TSEM Revenue (Quarterly) Chart

Data by YCharts.

Tower's Q3 update highlighted flat revenue from the prior quarter at $358 million, and net income of $52 million after subtracting the $290 million merger termination fee paid by Intel. Again, the good news is that the revenue decline has stabilized, and the bottom line hasn't dipped into the red.

However, the outlook for the fourth quarter implies that the no-growth environment will continue for now. At the midpoint, management expects revenue to be $350 million.

Management downplayed the current downturn, though, instead highlighting its operational efficiency and long-term goals. After all, despite its diminutive size compared to such manufacturing giants as Taiwan Semiconductor Manufacturing and GlobalFoundries, remaining profitable is an impressive achievement for Tower.

The company has also made a couple of investments with Intel (at its New Mexico facility) and with STMicroelectronics (in Agrate, Italy) to support future expansion needs of its key customers in North America and Europe.

Tower thinks it can be a best-in-class grower

As for the long-term goals, Tower says it is putting in place capacity to support revenue of $2.66 billion (with total manufacturing utilization of 85% across its facilities), nearly double the annualized revenue run rate in Q3 2023. At that revenue rate, Tower thinks it can generate about $500 million in annualized net income, compared to just over $200 million generated last quarter (again, on an annualized basis).

No specific time table was given for these targets. This is simply a financial model Tower is going for, but clearly Tower is eyeing having this capacity in place ahead of the next upcycle for the semiconductor industry. Perhaps that upturn will begin in 2024, with the resumption of growth in PC and smartphone sales -- although it looks like industrial chips for markets like automobiles will be in a decline through the first half of 2024.

Augmented and virtual reality (AR/VR, now sometimes referred to as "spatial computing") could also be a big new market. Tower talked up its OLED-on-silicon technology. That's the display technology being used by Apple for its Vision Pro coming out next year.

Does a hoped-for uptick in activity in 2024 make the stock a buy now? I'm remaining patient, and would now like to see some initial guidance for next year before deciding to buy. Given the flat results Tower is expecting for at least another quarter, I see no reason to get antsy. That said, this is potentially a very cheap stock with lots of value to be unlocked. Shares trade for just 10 times trailing-12-month earnings per share.

Tower Semiconductor is on my watch list as a top semiconductor stock I might be interested in buying early next year.