JP Morgan: AI demand "bursting" advanced process Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) Q1 gross margin may exceed expectations.

J.P. Morgan recently released a research report on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US), looking ahead to the performance of the first quarter of 2026. It is expected that the Q1 gross profit margin will increase significantly, with the rise in AI demand driving further increases in capital spending. The target price has been raised to NT$2400. As we enter the first quarter of 2026 financial reporting period, the bank believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will significantly exceed expectations in the first and second quarters of 2026, mainly due to the continued tight capacity of 3nm, high capacity utilization, increased demand for urgent wafers, and the depreciation of the New Taiwan Dollar. The bank expects the company's revenue in the second quarter of 2026 to increase by 6%-8% compared to the first quarter, with the upper limit of growth mainly constrained by the capacity of 3nm. The bank currently expects that the annual revenue growth in 2026 will reach 35% in US dollars, and there is hope for another 30% growth in 2027. In the past 2-3 months, there has been a significant increase in AI computing power demand (after the upward revision of capital expenditure prospect by Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR), and the bank believes that capital expenditure may become more aggressive in 2027/2028. Total capital expenditure from 2026 to 2028 is expected to reach $190 billion. Although the upward adjustment of the annual revenue guidance for 2026 may have to wait until the second quarter earnings conference call, the bank expects that the management's qualitative statements on the trends of AI and iPhone demand will be very positive, enough to offset the soft demand for client PCs and Android phones. The bank has raised its profit forecast for 2026 and 2027 by 4% and 6% respectively to reflect stronger growth and better gross margins, and has raised its target price for the end of 2026 to NT$2400 (corresponding to a forward P/E ratio of 20 times in 12 months). For the past 2-3 months, there has been a significant increase in AI computing power demand, and unprecedented tightness in demand for advanced processes. Driven by the strong growth in the workload of autonomous intelligent entities (ClaudeCode, OpenClaw, and other AI laboratory related products release), the demand for AI computing power has significantly increased in the past 3 months. The bank's research shows that the current demand for advanced process wafers is more intense, with most high-performance computing (HPC) customers locking in 3nm (N3) and 2nm (N2) capacity for 2027 in advance. In addition to the strong demand for AI accelerators and network chips, the recent recovery in CPU demand has further intensified the pressure on advanced process capacity. Despite the plan by Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR to add new supply by the end of 2026, the bank still expects that the utilization rate of the 3nm process will exceed 120% and 110% in 2026 and 2027 respectively. The bank expects that the 3nm business revenue will double in 2026, accounting for over 30% of total revenue, of which the demand for high-performance computing (HPC) accounts for about two-thirds of total demand for 3nm. Revenue growth is expected to exceed 30% in both 2026 and 2027, with growth in 2026 mainly due to supply constraints. Against the backdrop of strong demand and accelerated expansion by Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, the bank expects revenue growth in 2026 and 2027 to be 35% and 30% respectively in US dollars, driven by the increase in 3nm demand, growth in advanced packaging demand, and faster adoption of 2nm in 2027. J.P. Morgan said that the overall demand in 2026 still exceeds supply, and Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is expanding its 3nm/4nm capacity through innovative solutions: utilizing the 7nm factory to assist in the 3nm backend metal layer process; utilizing the 28nm factory to assist in the 5nm backend metal layer process; and starting to use part of the 3nm capacity in Fab 18 P9 in the fourth quarter of 2025. Therefore, the bank expects that wafer shipments in 2026 and 2027 will increase by 8% year-on-year, faster than the past two years. With the improvement of the 3nm/2nm structures, the increase in the proportion of HPC within 3nm, and a 6%-10% increase in prices for the same specifications, the average selling price of wafers (ASP) will continue to grow at a rate of around 20% year-on-year. Looking ahead to 2027, if electricity prices in Taiwan are raised again due to the increase in energy costs, advanced processes are expected to implement another 4%-5% increase in prices for the same specifications.