Why Tower Semiconductor Rallied in April

Shares of Tower Semiconductor (NASDAQ: TSEM) rallied 26% in April, according to data from S&P Global Market Intelligence.

Tower Semiconductor is a "lagging edge," or specialty semiconductor manufacturing company, which means it doesn't produce the most leading-edge chips in the world. However, Tower still differentiates itself through intellectual property in important chip types and materials, such as silicon photonics. "SiPho" is seen as the future of AI networking, and Tower Semi's stock has taken off over the past year as a result.

In April, Tower climbed another 26%, even with minimal company-specific news. The company noted a new product partnership to produce chips for the U.S. defense industry, which may have further strengthened Tower's bona fides. Additionally, positive earnings reports from leading chipmakers likely lifted sentiment for Tower as well.

April was a tremendous month for chip stocks

Although Tower didn't report earnings, Taiwan Semiconductor Manufacturing (NYSE: TSM) and several other major chipmakers did. The general outperformance spurred a big rise in stocks across the semiconductor sector, which likely helped Tower's stock, too.

In addition, Tower announced it will produce a high-performance radar beamforming chip from private chipmaker Axiro Semiconductor, based on Tower's Silicon Germanium (SiGe) technology. The chips are designed specifically for the U.S. defense industry, and will be produced at Tower's U.S.-based fabrication plants. Of note, Tower has fabs in the U.S., Japan, Israel, and Italy.

Tower's stock was also starting from a bit of a low to begin the month, as March's sell-off bottomed around March 30, before the announcement of a ceasefire between Iran and the U.S. on April 8. Additionally, on March 26, rival foundry GlobalFoundries (NASDAQ: GFS) sued Tower for patent infringement involving 11 patents across a range of products. For its part, Tower responded to the report by saying it "firmly rejects the ​allegations made by GlobalFoundries and will vigorously defend its intellectual ​property and technology leadership." Still, the legal tit-for-tat contributed to a small sell-off at the end of March.

Investors don't appear too worried about the lawsuit, however, given Tower's strong recovery during the subsequent month.

Image source: Getty Images.

Tower's momentum could continue as long as AI does

Tower's stock has soared 486% over the past year, and trades at a lofty 71.3 times this year's earnings estimates. That may be a bit expensive to buy today, but Tower's leadership position in producing silicon photonics should keep its revenue and profit growth momentum going over the medium-term. While the stock isn't high on many investors' lists of top AI stocks, it's well worth including in any "AI basket" investors may be considering today.

Billy Duberstein and/or his clients have positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends GlobalFoundries and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.