AI is still the driving force! Komo sings Multiple SMC (TSM.US) to thoroughly interpret the top ten key issues

The Zhitong Finance App learned that J.P. Morgan Chase released a research report reaffirming the “increase in holdings” rating of TSM.US. The target price is NT$1,275. In the report, J.P. Morgan Chase answered the top ten key issues that TSMC investors are concerned about recently.

1. How do you view the gross margin pressure brought about by foreign exchange and US expansion?

At the investor conference in the past month, gross margin was still the topic investors were most concerned about, and concerns about the impact of Taiwan dollar appreciation and overseas expansion persisted. According to J.P. Morgan Chase, the short-term impact of Taiwan dollar appreciation on gross margin (second quarter and early third quarter) was obvious (the impact of the 8% appreciation of the Taiwan dollar on gross margin was about 300 basis points), but this impact was also offset by some urgent orders received by TSMC after the 90-day tariff suspension. As a result, despite the strong appreciation of the Taiwan dollar, TSMC's gross margin is likely to remain within the guideline range (57-59%). Over the long term, TSMC can still maintain a high gross margin of 50% as the pricing of cutting-edge wafers is likely to continue to rise.

2. What are the pricing trends in 2026? Has continued price increases become the norm?

As J.P. Morgan previously indicated, TSMC is likely to raise the price of advanced process nodes again in 2025. Initially, J.P. Morgan expected the prices of N3, N4, and N5 to rise by 3-5%, but now the bank believes that the price increase may be close to 6-10% (in US dollars) to make up for the impact of the strengthening of the Taiwan dollar in recent months. In addition, customers designated overseas factories may face price increases of more than 10% to cover additional costs. However, most investors see such price increases as a coincidence and do not see this as the norm in the next few years.

3. How confident is TSMC's 2024-2029 revenue compound annual growth rate guideline of 20%?

J.P. Morgan found that some investors are skeptical about TSMC's long-term growth guide (about 20% CAGR 2024-29) because they are concerned about continued growth in artificial intelligence (AI) and non-artificial intelligence sectors. However, TSMC has successfully implemented its long-term guidance over the past 15 years. J.P. Morgan believes that insufficient understanding of the long-term comprehensive average selling price (ASP) growth potential and the trend of continuing differentiation between most equipment value growth and unit growth may be the main reason investors remain cautious.

4. What is the production capacity and demand curve for the N2 process? Are N2 wafers too expensive?

Recently, some people are worried that TSMC has slowed down its 2026 N2 construction plan due to excessive wafer prices. However, J.P. Morgan saw no such signs, and it is expected that the N2 process's production capacity will climb faster than N3 or N5. AMD, Apple, MediaTek, Qualcomm, and Intel may all begin producing N2 wafers at TSMC, and Apple will remain the main source of demand by 2026. J.P. Morgan expects the price of N2 wafers to be about 20%-25% higher than the N3E, the mobile version of the N2 will cost about $26,000-27,000, and the high-performance computing version may be more expensive.

5. What is TSMC's projected capital expenditure in 2026? When did you start using high numerical aperture EUV?

J.P. Morgan expects TSMC's capital expenditure to be around $40 billion in 2025 and around $45 billion in 2026. If TSMC signs a large-scale N2 production capacity agreement with Intel, then there is room for the company's capital expenditure to rise.

In terms of high numerical aperture EUV applications, J.P. Morgan remains cautious. The bank anticipates that TSMC will not use high numerical aperture EUV in the A16 process, and that the A14 process may continue to use low numerical aperture EUV and dual modes. Some A14 processes may use high numerical aperture EUV (for technology maturity testing, etc.). Only in 2029-2030 will A10 process nodes begin to use high numerical aperture EUV in large quantities.

6. What is the impact of US restrictions on China's EDA?

J.P. Morgan believes that recent US EDA restrictions on Chinese customers may have a long-term negative impact on TSMC's leading Chinese customers, but consumer customers may eventually obtain licenses or cooperate with TSMC through design service providers. N4 and N3 products may not be greatly affected, but N2-based products may face obstacles. Furthermore, the supply chain seems to be more positive that Nvidia will eventually be approved to ship some GPUs (such as the GB202 downgraded version) to China. It is expected that initial demand for such products will be strong, thereby supporting N4 capacity utilization.

7. Can CoWOS production capacity expansion continue in 2026? Is supply balanced?

Compared with industry insiders, J.P. Morgan is more cautious about the 2026 CoWOS production capacity expansion plan, and continues to expect TSMC's production capacity to grow from 71,000 wafers (wfpm) at the end of 2025 to 86,000 wfpm at the end of 2026, and the pace of expansion will slow down in 2026. AI-related CowOS demand is expected to remain roughly balanced in 2026. J.P. Morgan believes that as companies such as Nvidia, AMD, and Qualcomm migrate in 2026, CowOS-L may become the main production capacity.

8. What is TSMC's production capacity plan for N4 and N7? Will we see more conversions?

J.P. Morgan expects TSMC to begin converting more N5/N4 production capacity to N3 production capacity by the end of 2025, as demand for artificial intelligence accelerators continues to shift to N3 (for Nvidia, AMD, and ASIC suppliers). The N5/N4 series is not expected to face the challenge of overcapacity like the N7, because capacity construction seems to be more gradual, and the peak production capacity is far below the peak level of N7. The N7 capacity utilization rate is still insufficient. Currently, the utilization rate is 70%, and there is no significant sign of improvement in the second half of 2025. However, J.P. Morgan did not see any sign of N7/N6 capacity conversion, because production capacity for TSMC's future products (WiFi7, RF transceivers, SSD controllers, etc.) will begin to increase within the next two years, and may fill the N7 overcapacity.

9. Will CoOS orders be cut and does that mean AI demand has peaked?

Some investors expect the AI spending cycle to peak, and J.P. Morgan has a different opinion. J.P. Morgan believes that the demand trend for artificial intelligence continues to be strong, thereby driving AI stocks and TSMC higher in the second half of the year. As TSMC is no longer a bottleneck in artificial intelligence calculations, J.P. Morgan Chase did not rule out minor adjustments to the CoWoS forecast for the second half of 2025. Nvidia CoOS shipments are expected to grow healthily in 2026, and demand for artificial intelligence will continue to grow strongly, as demand for artificial intelligence computing is likely to far exceed supply.

10. How will TSMC handle growing cash reserves?

Considering that TSMC's cash flow has been growing rapidly (reaching $30 billion in 2024), and the cash balance is close to 10% of the market value, investors have been asking whether TSMC is likely to pay a special dividend or make a systematic repurchase. J.P. Morgan Chase does not expect a one-time dividend payment or repurchase. TSMC's main channel for returning cash to shareholders will be regular quarterly dividends. As capital intensity may have peaked, and future cash flow growth is strong, TSMC's cash dividend is expected to grow rapidly in the next few years. J.P. Morgan believes that the dividend per share may double in the next few years, while still supporting the capital expenses required for revenue growth of about 20%.

Overall, J.P. Morgan Chase expects TSMC stocks to continue their recent excellent performance, as AI demand trends are more clear, growth prospects in 2026 have good visibility, prices for advanced processes will rise, and gross margin concerns caused by foreign exchange factors and rising costs have begun to subside.