CPU Becomes TSMC's Third Wave Growth Engine; Target Price Raised to NT$3,300

Overview

The report raises TSMC's revenue and earnings forecasts and target price, with the core change coming from CPU demand exceeding expectations due to agentic AI workloads. In addition to AI accelerators, CPU demand related to AMD, Intel, Apple, Amazon, Google, and Arm is driving a rapid N2 ramp and improving utilization of nodes such as N3, N5, and N7. Bernstein believes the recent share price pullback provides a good entry opportunity.

Core views

TSMC's CPU business has gone through three waves of expansion: first driven by AMD, Apple, and Amazon, then by increased Intel outsourcing, and most recently by broader CPU demand driven by agentic AI. CPU revenue is expected to grow at a CAGR of 50% to 60% from 2026 to 2027, approaching XPU in terms of wafer revenue contribution by 2027. CPU and ASIC demand is prompting TSMC to accelerate wafer capacity buildout, but CoWoS expansion will be relatively restrained because the company is more focused on preventing its front-end wafer business from being constrained by downstream packaging bottlenecks than on defending its advanced packaging share.

Analysis framework

The report uses a bottom-up analysis of customer and process demand, combined with CPU customer mix, N2 to N7 node ramps, capital expenditure, and advanced packaging supply forecasts, to update the 2026 to 2028 financial model; valuation uses a 20x forward P/E multiple applied to EPS forecasts for future Q5 to Q8.

Methodology notes

• Valuation methodsForward P/E Method

  Determine the target price by multiplying the target P/E ratio by forward earnings estimates.

  A 20x target P/E is applied to future Q5 to Q8 EPS estimates of NT$164, resulting in a 12-month target price of NT$3,300 for 2330.TW.

• Earnings ForecastBottom-up Driver Model

  Forecast revenue and earnings based on changes in customers, products, process nodes, and capacity.

  The model focuses on incorporating CPU customer expansion, N2 ramp-up, N3/N5/N7 chiplet demand, capital expenditure, and changes in CoWoS-equivalent capacity.

• Relative ValuationComparable Index P/E Comparison

  Compare the company's forward valuation level with industry and technology indices.

  TSMC's 18.8x forward P/E represents a discount of about 14% to SOX and about 25% to Nasdaq.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Taiwan Semiconductor Manufacturing Co Ltd（2330.TW）

  Core recommended stock

  Strengths

  Leading advanced processes, joint growth in CPU and XPU demand, diversified customer mix, upward earnings forecast revisions, and a valuation discount relative to indices.

  Weaknesses

  High capital expenditure, overseas manufacturing costs may limit margin expansion, and the advanced packaging moat is weaker than wafer manufacturing.

  Comparison

  18.8x forward P/E represents discounts of about 14% and 25% to SOX and Nasdaq, respectively.

  Risks

  Overall market valuation contraction, Intel regaining and maintaining technological leadership, and geopolitical uncertainty.

• AMD（US.AMD）

  Important customer for TSMC CPU and advanced process demand

  Strengths

  Venice CPU and MI450 are driving N2 to contribute revenue earlier than prior nodes, and AMD remains TSMC's largest CPU customer.

  Weaknesses

  Some advanced packaging is handled by ASE, so TSMC cannot capture all packaging value.

  Comparison

  AMD accounted for about half of TSMC's CPU revenue in 2023; by 2025 it remains the largest, but Intel has moved close to second place.

  Risks

  Product ramp-up, competitive dynamics, and end demand may fall short of expectations.

• NVIDIA（US.NVDA）

  Important customer for TSMC XPU wafer demand

  Strengths

  AI accelerators still contribute more total revenue than CPUs and bring additional packaging revenue.

  Weaknesses

  Products such as Vera can use CoWoS-equivalent packaging from Amkor, weakening TSMC's packaging share.

  Comparison

  By 2027, CPU and XPU wafer revenue contributions are expected to be roughly comparable in scale, but XPU still includes more packaging revenue.

  Risks

  Increase in alternative packaging capacity and fluctuations in AI infrastructure demand.

• Alphabet（US.GOOGL）、Meta（US.META）与Arm（US.ARM）

  Indirect beneficiaries and customer sources of agentic AI-related CPU demand

  Strengths

  Google Axion and Arm's AGI CPU for Meta broaden TSMC's CPU customer base and support demand for advanced nodes such as N3.

  Weaknesses

  The mass production pace and scale of in-house chip projects are uncertain.

  Comparison

  Represents CPU growth expanding from traditional x86 and consumer electronics customers to cloud computing and AI platform customers.

  Risks

  In-house CPU adoption, software ecosystem, and deployment progress may fall short of expectations.

Key data

• 12-month target priceNT$3,300Based on a 20x forward P/E; closing price was NT$2,380.
• Potential upsideAbout 39% to 40%Calculated based on the closing price on August 10, 2026.
• 2027 CPU revenueOver US$30 billionExpected to account for about 16% of TSMC's total revenue, with wafer revenue contribution approaching XPU.
• 2026 to 2028 capital expenditureUS$64B／US$75B／US$82BRecent incremental spending is expected to mainly go to wafer capacity rather than CoWoS.
• 2026 US dollar revenueUS$173BExpected to grow 41% year over year.
• 2026 NT dollar revenueNT$5,457BExpected to grow about 43% year over year.
• 2026 EPSNT$110.7Expected to grow about 67% year over year, above the previous forecast of NT$101.62.
• 2027 EPSNT$144.85Above the previous forecast of NT$124.63.
• N2 wafer revenue contributionAbout 20% in 2027Expected to be driven by AMD Venice, MI450, mobile chips, and some Intel CPUs.
• Forward P/E18.8xAbout a 14% discount to SOX and about a 25% discount to Nasdaq.

Impact & implications

CPU is shifting from a supplementary demand source to an important wafer revenue driver alongside XPU, broadening growth across TSMC's advanced processes and supporting higher revenue and EPS forecasts. Large-scale capital expenditure should help ease capacity shortages at advanced nodes, but also raises execution and asset return requirements. In advanced packaging, TSMC's tolerance of capacity expansion by alternatives such as Amkor, ASE, and Intel EMIB-T may pressure CoWoS long-term margins, but helps avoid packaging shortages constraining the core wafer business.

Risks

• Compression of market-wide valuation multiples may lower the target P/E.
• Intel regaining and sustaining process technology leadership over the long term may reduce outsourcing demand for TSMC.
• Geopolitical uncertainty may affect operations, supply chains, and valuation.
• CPU and agentic AI demand falling short of expectations could lead to lower utilization of new capacity.
• Large-scale capital expenditure, overseas production costs, and capacity ramp-up may pressure free cash flow and margins.
• Expansion of alternative advanced packaging capacity by Amkor, ASE, Intel, Samsung, and others may pressure CoWoS share and margins.

What to watch

• Whether CPU revenue can achieve a 50% to 60% CAGR in 2026 to 2027.
• The ramp-up speed of N2 in the second half of 2026 and in 2027, and whether its wafer revenue share can reach about 20%.
• Mass production progress for products such as AMD Venice, MI450, Apple A20 series, Google Axion, and Intel Nova Lake.
• Execution of 2026 to 2028 capital expenditure and the pace at which advanced node capacity shortages are eased.
• Expansion and utilization of CoWoS, ASE, Amkor, and Intel EMIB-T-equivalent capacity.
• Capacity expansion and commercialization progress for hybrid bonding SoIC, CoPoS, and CPO technologies.
• Whether gross margin and operating margin can remain stable amid rising overseas production costs.
• Whether TSMC's valuation discount to SOX and Nasdaq narrows.