Morgan Stanley: Slower growth in performance does not change long-term trend, maintains "hold" rating on TSMC

Morgan Stanley released a research report, maintaining a "overweight" rating on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR with a target price of 1388 New Taiwan Dollars. The bank stated that although the growth in demand for artificial intelligence is still long-term, the first quarter of 2025 may be a slow start for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, with global semiconductor inventory replenishment expected in the second half of the year. The report predicted that due to seasonal factors related to the iPhone, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's revenue in the first quarter of 2025 is expected to decrease by 5% compared to the previous quarter. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will announce its fourth quarter performance on January 16 and provide guidance for the first quarter. The company is currently raising wafer prices on average by 3-4% and has also received more outsourcing from Intel Corporation (INTC.US) for the 3nm Lunar Lake CPU. However, due to limited upward potential in iPhone 16 sales, the bank expects a reduction of about 10-15,000 in 3nm wafer production capacity in the first quarter of 2025, meaning A18 chip capacity will be around 4-6 million. Currently, Wall Street generally expects similar figures to the bank's estimates, but considering the increase in wafer prices, investors surveyed by the bank seem to expect only a slight decrease in revenue in the first quarter of 2025. Furthermore, Morgan Stanley expects Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's gross profit margin in the first quarter of 2025 to fall to around 57%. The bank projects a gross profit margin of 59.3% in the fourth quarter, at the higher end of the guidance range. However, the bank anticipates a decline in gross profit margin to 57% in the first quarter of 2025 due to seasonal factors and resistance to price adjustments from some major artificial intelligence chip customers. In addition, dilution of profits from overseas wafer factories in the United States and Japan is expected to reach about 2% in the first quarter of 2025. Looking ahead to 2025 growth, gross margin, and capital expenditure expectations, Morgan Stanley believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR typically provides conservative guidance at the beginning of the year and then exceeds expectations. The bank expects the company's year-over-year growth in 2025 to be in the range of 21-23% (market consensus is 27-29%) in US dollars, with a gross profit margin surpassing 53% (market consensus is 57-59%). As for capital expenditures in 2025, the bank predicts 38 billion New Taiwan Dollars, as capacity expansion for 2nm/3nm is unlikely to increase further after Intel Corporation's restructuring. Finally, the bank maintains its forecast for CoWoS capacity in 2025 at 80kWpm, with plans to reach 100kWpm by 2026. Overall, the bank expects cloud artificial intelligence to account for 25% of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's revenue in 2025, which should still be supply-driven. Once chip inventory is fully digested, and/or a replacement cycle for AI PCs/smartphones is triggered, a broader semiconductor cycle may recover. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's stock price is valued at 18 times earnings per share for 2025, with a compound annual revenue growth rate of 26% for 2025-26. In the bank's view, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR remains attractive.