Under the AI trend, the shortage of advanced process products is the basis for TSMC's price increase to be accepted by customers; Apple, Qualcomm, Nvidia, and AMD have all reserved TSMC's 3nm process production capacity, and customer queues have emerged, all the way to 2026; TSMC's capital expenditures on advanced process production lines continue to rise.
Morgan Stanley pointed out in its latest report that according to the supply chain survey, most of Taiwan Semiconductor's customers have agreed to raise foundry prices in exchange for reliable supply, which will drive Taiwan Semiconductor's gross margin further. According to Merrill Lynch analysts' estimate, Taiwan Semiconductor's gross margin will climb to 55.1% by 2025 and approach 60% to 59.3% by 2026. Its gross margin this year was already raised to 52.6% due to the improvement in production efficiency.
In addition, driven by the long-term trend of AI and the rise in gross margin, the compound annual growth rate (CAGR) of TSMC's profit from 2023 to 2026 will reach 26%, and the institution has increased TSMC's after-tax net profit per share (EPS) from 2024 to 2026 by 5%, 2%, and 1%, respectively. After the adjustment, the EPS will reach NT $ 39.2, NT $ 51.2, and NT $ 65.3. Based on its strong earnings growth and relatively low price-earnings ratio (only 19.6 times, far lower than 34.9 times for Nvidia and 32.9 times for ASML Holding), Merrill Lynch has raised its target price for TSMC to NT $ 1,280, up 28% from the previous target price, becoming the second highest target price on Wall Street.
Maintaining TSMC's 'outperform the market' rating, Merrill Lynch also raised its target price to NT $ 1,280 based on its strong earnings growth and relatively low P/E ratio. Currently, TSMC's stock price is NT $ 1,005 per share. Almost all of Wall Street's mainstream organizations have reached a consensus on TSMC's target price. The target prices given by institutions from high to low are HSBC's NT $ 1,370, Merrill Lynch's NT $ 1,280, Goldman Sachs' NT $ 1,160, Citibank's NT $ 1,150, Barclays' NT $ 1,096, Morgan Stanley and JPMorgan, which are both NT $ 1,080, UBS Group's NT $ 1,070, and Bank of America's NT $ 1,040.
The benefits of the AI wave have driven strong demand for advanced process products, on which TSMC's price hike has been accepted by customers in this round. Currently, there is a surge of customers queueing up to use TSMC's 3nm family process technology, including Apple, Qualcomm, Nvidia, and AMD, among others. Taiwan Economic Daily reported that the new battles of MediaTek and Qualcomm's flagship 5G mobile phones will start this year, and both of the new chips will be produced using TSMC's 3nm process, and they are soon to enter the mass production stage. Apple is expected to use TSMC's N2 process and SoIC-X technology from the second half of 2025.
Under the AI wave, the products of advanced process are in short supply, which is the basis for TSMC's price hike to be accepted by customers.
In June this year, it was reported by sources that under the promotion of AI application, new PC platforms, HPC applications, and new high-end smartphones, TSMC's 5nm, 4nm, and 3nm processes are full-loaded. Based on this, TSMC will start a new price negotiation in the second half of this year, mainly aimed at 5nm, 3nm, and future 2nm processes. The decision to raise prices is expected to take effect in 2025 at the earliest.
Taiwan Economic Daily reported that Apple, Qualcomm, Nvidia, and AMD have all placed large orders for TSMC's 3nm process technology and there is a surge of customer queueing up to use it. There are also many orders that will last until 2026. MediaTek and Qualcomm's new 5G flagship phones will soon be released this season, and both new chips are produced using TSMC's 3nm process technology, and they are in the recent stage of mass production.
The 3nm process technology is currently the most advanced node technology. TSMC mentioned before that its 3nm process capacity will triple this year, but it is still in short supply.
Merrill Lynch believes that based on continuous investment in advanced processes, especially 3nm and 2nm, TSMC's predicted capital expenditure for 2025 and 2026 has been raised to US $ 35 billion and US $ 37 billion, respectively.
Taiwan Economic Daily previously cited industry sources as saying that due to the continued expansion of R&D on the most advanced 2nm process, coupled with the unexpectedly strong demand for 2nm, TSMC's capital expenditure in 2025 is expected to reach a range of US $ 32 billion to US $ 36 billion, the second highest in years, representing a 12.5% to 14.3% YoY increase.
Sinolink Securities previously stated in a research report that TSMC's 2023 capital expenditure was US $ 30.4 billion, and it is expected to be US $ 28-32 billion in 2024, of which 70%-80% will be used for advanced process expansion, 10%-20% will be used for mature process specialty technology, and the remaining 10% will be used for advanced packaging, testing, mask production, etc.