JP Morgan: AI drives "rocket-like" growth in the performance of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US), significant contribution from N2/N3 process.

JPMorgan has released a research report, maintaining a "buy" rating on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US), and raising its Taiwan Stock 2026 target price from 1275 New Taiwan Dollars to 1550 New Taiwan Dollars. It has also raised its earnings per share expectations for 2025-2026 and revenue growth expectations for 2026. JPMorgan points out that strong growth in data center AI demand, the release of advanced processes (N2/N3) capacity, and high gross margins will be key drivers supporting the performance growth of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. JPMorgan expects Taiwan Semiconductor Manufacturing Co. Sponsored ADR's revenue in 2026 to increase by 24% when priced in US dollars, mainly benefiting from four factors: strong demand for N3 process, sufficient orders for high-performance computing accelerators (including GPUs, TPUs, and Tranium ASIC) from companies like NVIDIA Corporation (NVDA.US) and AMD (AMD.US); increasing demand for N2 process, as all iPhone models will adopt the N2 process from the second half of 2026, and new flagship SoCs from Qualcomm (QCOM.US) and MediaTek will contribute to incremental demand; ASP increases for advanced processes such as N5, N4, N3 are expected to grow by 6%-10%; and rapid growth in advanced packaging business, with a 60% increase in CoWoS wafer shipments in 2026. Additionally, the firm predicts that due to increased demand for WiFi 7 and RF transceivers, N7 capacity utilization is expected to slightly improve in 2026. JPMorgan emphasizes that data center AI business has become the core long-term growth engine for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. The firm has raised its forecast for the compound annual growth rate of data center AI revenue for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR from 2024 to 2029 to 53%, and expects that the company may further raise its five-year data center AI revenue CAGR guidance from the current mid-range of 40% when it releases its 2026 performance guidance in January 2026. From a demand perspective, AI accelerators (GPU and ASIC) remain the key driver, expected to account for 68% of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's total data center AI demand by 2029. JPMorgan notes that the continued release of computational power demands from global major cloud service providers, emerging cloud enterprises, AI labs, and sovereign AI projects in 2026 will drive GPU demand to remain high, and most AI accelerators will migrate from N4 processes to N3 processes starting from the end of 2025, further boosting N3 capacity utilization rates. Demand for network equipment and HBM (High Bandwidth Memory) basic chips will also be important drivers. JPMorgan predicts that from 2024 to 2029, the CAGR of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's AI network equipment revenue will reach 58%, with the expansion of GPU/AI clusters, the popularization of Silicon Photonics and CPO technology, network equipment will account for 20% of data center AI demand by 2029 (compared to 17% in 2025); regarding HBM basic chips, starting in 2026, companies like NVIDIA Corporation and AMD will gradually adopt HBM4 configurations, with significant growth expected in HBM basic chip demand in 2027-28, reaching $12 billion in revenue for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR by 2029, accounting for 12% of total data center AI revenue. To meet the strong demand, JPMorgan expects Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's capital expenditures in 2026 to increase from the previous $45 billion to $48 billion, with a focus on N2, N3 advanced process capacity, and advanced packaging areas. Specifically, in 2026 Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's N2 process capacity is expected to increase by around 50,000 wafers per month, with mass production capacity reaching 65,000 wafers per month by the end of the year (equivalent to 100,000-105,000 wafers per month in lithography), to meet the demands of customers like Apple Inc. and Qualcomm; in terms of N3 process, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR plans to convert some of its N4 capacity to N3 capacity, and may also start early construction of the third phase of N3 capacity at its Arizona factory to address unexpected demand for AI accelerators. Overall, benefiting from Apple Inc., better-than-expected AI data center demand, and semiconductor tariff exemptions, JPMorgan currently expects Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's revenue to remain flat in the fourth quarter of 2025 (previously implied a 9% decline), with a 35% year-over-year growth in U.S. dollar revenue for the fiscal year 2025. The firm also believes that with the support of increased capacity utilization rates and the weakening of the New Taiwan Dollar exchange rate, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's gross margin in the fourth quarter will likely maintain 50%, and the gross margin in 2026 will remain high at 50%, supported by factors including stable New Taiwan Dollar exchange rate, lower-than-expected capacity dilution at U.S. factories, pricing hikes for advanced processes, and continued strong demand for leading-edge processes, ensuring stable gross margin even with a 25% increase in depreciation costs in 2026.