Morgan Stanley: AI-driven TSMC performance shows "rocket-like" growth with significant contributions from N2/N3 processes

According to the Zhitong Finance APP, JP Morgan has released a research report maintaining an "Overweight" rating on Taiwan Semiconductor (TSM.US), raising its target price for Taiwan stocks in June 2026 from NT$1,275 to NT$1,550, while also increasing its earnings per share expectations for 2025-2026 and revenue growth expectations for 2026. JP Morgan pointed out that strong growth in AI demand from data centers, the release of advanced process (N2/N3) capacity, and high gross margins will be the core driving forces supporting Taiwan Semiconductor's performance growth.

JP Morgan expects Taiwan Semiconductor's revenue in USD terms to grow by 24% in 2026, mainly due to four factors: first, strong demand for N3 process, with ample orders for high-performance computing (HPC) accelerators (including GPU, TPU, and Tranium ASIC) from companies like Nvidia (NVDA.US) and AMD (AMD.US); second, the demand for N2 process is ramping up, with all iPhone models' application processors adopting N2 process starting in the second half of 2026, and Qualcomm (QCOM.US) and MediaTek's new flagship SoCs will also contribute incremental demand; third, the average selling price (ASP) of advanced processes is expected to increase by 6%-10% for N5, N4, N3, etc.; fourth, the advanced packaging business is growing rapidly, with CoWoS wafer shipments expected to increase by 60% in 2026. Additionally, the firm expects that due to increased demand for WiFi 7 and radio frequency transceivers, the utilization rate of N7 capacity will slightly improve in 2026.

JP Morgan emphasized that the AI business in data centers has become Taiwan Semiconductor's core long-term growth engine. The firm has raised its compound annual growth rate (CAGR) expectation for Taiwan Semiconductor's data center AI revenue from 2024 to 2029 to 53%, and it is anticipated that when Taiwan Semiconductor releases its 2026 performance guidance in January 2026, it may further raise the five-year data center AI revenue CAGR guidance from the current mid-point of 40%.

From the demand structure perspective, AI accelerators (GPU and ASIC) remain the core driving force, expected to account for 68% of Taiwan Semiconductor's total demand for data center AI by 2029. JP Morgan noted that in 2026, the computing power demand from global large cloud service providers, emerging cloud companies, AI laboratories, and sovereign nation AI projects will continue to be released, driving GPU demand to remain high, and most AI accelerators will begin migrating from N4 process to N3 process starting at the end of 2025, further boosting N3 capacity utilization.

Demand for network equipment and HBM (high bandwidth memory) base chips will also become significant incremental contributors. JP Morgan predicts that from 2024 to 2029, Taiwan Semiconductor's AI network equipment revenue CAGR will reach 58%. As the scale of GPU/AI clusters expands and the adoption of silicon photonics and co-packaged optics technology accelerates, network equipment is expected to account for 20% of data center AI demand by 2029 (up from 17% in 2025); in terms of HBM base chips, starting in 2026, companies like Nvidia and AMD will gradually adopt HBM4 configurations, and it is expected that demand for HBM base chips will significantly increase in 2027-28, with Taiwan Semiconductor's HBM base chip revenue reaching $12 billion by 2029, accounting for 12% of total data center AI revenue

To meet strong demand, JP Morgan expects Taiwan Semiconductor's capital expenditure in 2026 to increase from the previous $45 billion to $48 billion, focusing on N2 and N3 advanced process capacity and advanced packaging. Specifically, in 2026, Taiwan Semiconductor's N2 process capacity will add approximately 50,000 wafers per month, with mass production capacity reaching 65,000 wafers per month by the end of the year (with photolithography equivalent capacity reaching 100,000 to 105,000 wafers per month) to meet the needs of clients such as Apple (AAPL.US) and Qualcomm; for the N3 process, Taiwan Semiconductor plans to convert part of its N4 capacity into N3 capacity, while possibly accelerating the construction of the third phase of N3 capacity at its Arizona plant to respond to the unexpectedly high demand for AI accelerators.

Overall, benefiting from better-than-expected demand from Apple and AI data centers, as well as semiconductor tariff exemptions, JP Morgan currently expects Taiwan Semiconductor's revenue in the fourth quarter of 2025 to remain flat quarter-on-quarter (previously implied guidance was a 9% quarter-on-quarter decline), with revenue growth in fiscal year 2025 reaching 35%. The bank also believes that supported by increased capacity utilization and a weaker New Taiwan Dollar exchange rate, Taiwan Semiconductor's gross margin in the fourth quarter may remain at a high level of 50%; it is expected that Taiwan Semiconductor's gross margin in 2026 will still maintain a high level of 50%, with main supporting factors including stable New Taiwan Dollar exchange rates, lower-than-expected dilution of capacity from U.S. factories, price increases for advanced processes, and sustained strong demand for leading processes. Even with a 25% increase in depreciation costs in 2026, strong AI demand and price increases will still ensure stable gross margins