TSM.US (TSM.US) won a lot of praise from Goldman Sachs: Strong AI demand supports the growth momentum and the stock price still has room to rise by nearly 40% until 2027

The Zhitong Finance App learned that foundry giant TSM.US (TSM.US) will announce the results for the third quarter of 2026 on October 15. Goldman Sachs pointed out in a recently released research report that TSMC's strong performance growth momentum is expected to continue until 2027, while capital expenditure will gradually increase to support long-term demand. Goldman Sachs reiterated its “buy” rating for TSMC. The target price for TSMC shares listed in Taiwan was raised from NT$3,100 to NT$3,300, with room for an increase of nearly 28% from last Friday's closing price; the target price for TSMC US stocks was raised to $660, with room for an increase of nearly 40% from last Friday's closing price.

Q3 and Q4 revenue continued to grow strongly month-on-month, and the profit dilution effect of N2 production expansion was limited

Supported by continued strong artificial intelligence (AI) /high performance computing (HPC) demand, TSMC's revenue is expected to increase 15.3% month-on-month in the third quarter, followed by a further 11.0% month-on-month increase in the fourth quarter of 2026 (all in US dollars). In terms of profitability, Goldman Sachs expects TSMC's gross margin to fall slightly to 67.5%/67.3% for the third and fourth quarter of 2026, respectively, down from 67.7% in the second quarter of 2026, reflecting the dilution effect brought about by continuing to expand N2 production.

Supported by broader AI demand, the growth momentum continues until 2027

Goldman Sachs expects TSMC to end strongly in 2026 as demand for AI GPUs/AI ASICs, network devices, and server CPUs continues to grow strongly until 2027. Notably, the demand for stronger CPUs, driven by intelligent AI (agentic AI), is a key change in the past year. The bank expects TSMC's revenue to increase 42.0% year over year in US dollars in 2026; revenue in 2027 will increase 36.9% year over year in US dollars, higher than the 32.0% forecast previously.

At Goldman Sachs's Communacopia+ Technology conference, TSMC management emphasized that lower token costs should stimulate further growth in AI usage. At the same time, discussions with customers and US cloud service providers (CSPs) further strengthened Goldman Sachs's confidence in demand and infrastructure readiness. The bank believes that these trends will support continued strong demand for advanced processes, particularly N2 and N3 processes. Despite TSMC's further expansion of production capacity, management still anticipates that the supply of these two processes will continue to be insufficient.

On the supply side, Goldman Sachs expects that additional production capacity, N5 to N3 capacity conversion, and production efficiency improvements will support an increase in wafer output, while the continued expansion of CoWOS production capacity will help achieve related wafer shipments. The bank expects gross margin to improve moderately to 67.5% in 2027, up from 67.2% in 2026, mainly supported by higher pricing, a favorable product portfolio, continued high capacity utilization, and continuous improvement in production efficiency.

Earnings per share forecast adjustment

Goldman Sachs raised TSMC's 2026/2027/2028 earnings forecast by 1%/7%/8%, respectively. The reasons include: 1) it is expected that the degree of gross margin dilution due to the expansion of N2 production will be lower than previously expected; and 2) in view of stronger AI/HPC demand, especially the increased demand for N2/N3 processes, it raised the capacity utilization rate (UTR) assumption.

Increase capital expenditure to support long-term expansion

Goldman Sachs anticipates that TSMC will further increase investment in production capacity to support the long-term needs of customers. The bank maintained TSMC's 2026 capital expenditure forecast of 64 billion US dollars, and raised the 2027/2028 capital expenditure forecasts to 85 billion US dollars/98 billion US dollars, respectively. The previous forecasts were 78 billion US dollars/82 billion US dollars, respectively, to take into account: 1) cost inflation by equipment suppliers; and 2) initial expenses involved in potential new Texas expansion projects. However, the bank expects that the new site will not enter large-scale mass production until after 2032.

In terms of production capacity, Goldman Sachs continues to expect N3/N2 production capacity to reach 200 thousand tablets/month/140 thousand tablets/month, and 220 thousand tablets/month/200 thousand tablets/month by the end of 2027 and 2028, respectively.

Other areas of focus

TSMC management will hold an earnings conference call on the same day as announcing the third-quarter results. Goldman Sachs has pointed out the main points that several analysts will focus on.

Long-term AI growth prospects. Goldman Sachs believes that the further expansion of AI demand from accelerators to CPUs and network devices will further support TSMC's long-term growth opportunities. The bank wants management to update its key assumptions about the AI outlook until 2030, including where demand drivers have increased the most in the past year and what factors are likely to substantially change this outlook.

Long-term capital expenditure prospects and US expansion. As customer demand continues to drive investment in advanced process capacity and advanced packaging, Goldman Sachs wants management to further explain long-term capital expenditure trends and the visibility of demand to support these investment decisions. The bank also wants management to update relevant comments on whether customer demand may drive TSMC to further expand its US business beyond the existing Arizona plant, and the likely timing and scale of such investments.

Foundry competition and technological leadership. Goldman Sachs said it would like to know management's views on the evolving competitive landscape, including Intel, Samsung, and Terafab, and the impact of these changes on TSMC's long-term market positioning. In particular, the bank wants to learn more about TSMC's technological leadership and whether management anticipates that this gap will widen or narrow in the next few generations of manufacturing processes.

Summarize

Goldman Sachs says it is optimistic about TSMC because the bank believes that as a leading global foundry, its strong technological leadership and execution capabilities make it more capable than its peers to seize long-term structural growth opportunities in the industry, especially in the fields of AI/5G/HPC/electric vehicles (EVs).

Goldman Sachs believes that TSMC will achieve the 25% compound revenue growth rate (CAGR) target in the next few years, while maintaining long-term gross margin above 56%. The bank also pointed out that TSMC's valuation is attractive, and the stock price is currently in the middle of its 10-year trading history range.