Morgan Stanley stated that Taiwan Semiconductor's (TSM.US) gross margin in the second quarter was 53.2%, higher than the bank's expected 52.7%, and the median gross margin guidance for the third quarter was 54.5%, higher than the bank's and market expectations of 52% and 52.5%, which was the most significant surprise. The company claimed that the improvement in gross margin was due to the growth of revenue scale, productivity improvement, and cost optimization.

The report also indicated that the company disclosed for the first time that overseas factories dilute overall gross margin by 2 to 3 percentage points. The management is confident in maintaining a gross margin of 53% or above next year. The company also believes that the demand for cloud AI still outpaces supply, and it is uncertain whether supply can catch up with demand in 2022 and 2026.

The bank raised its earnings per share forecast for the company from this year to 2026 by 3% to 6%, and the target price increased from NTD 1,180 to NTD 1,220. The target prices for the most optimistic and pessimistic scenarios were also raised from NTD 1,420 and 655, respectively, to NTD 1,480 and 680.