Morgan Stanley maintains TSMC overweight, highlighting AI demand, gross margins, and foundry competition before earnings

Overview

This is a Morgan Stanley company research report on U.S. investor feedback before TSMC’s earnings, focused on pre-earnings U.S. investor sentiment. Ahead of TSMC’s 2026 second-quarter results conference call, the report consolidates the concerns of roughly 30–40 U.S. investors and gives views on Q2’26 performance, Q3’26 guidance, AI semiconductor demand, gross margins, leading-edge capacity expansion, capex, and valuation. The core conclusion is to maintain an Overweight rating and NT$2,888 target price, arguing that TSMC still retains technology and capacity leadership in AI, high-performance computing, and leading-edge foundry.

Core views

Core views include: first, TSMC’s revenue growth outlook is stronger than the market, with Q3’26 U.S.-dollar revenue expected to grow 10%-15% sequentially and 2026 full-year revenue growth close to 40%; second, AI CPU/GPU/ASIC/networking demand will continue to absorb advanced-node capacity freed up by non-AI demand such as smartphones; third, the market expectation of 3Q26 gross margin lifting to 69%-70% is likely too high, with Morgan Stanley preferring 67%-68%, but long-term gross margin remains supported by wafer price increases, tight advanced-node supply-demand conditions, and pricing power; fourth, TSMC remains ahead of Samsung Foundry and Intel Foundry in 3nm, 2nm, advanced packaging, and EUV access; fifth, both 2027 and 2028 capex expectations are US$75bn, with three-year capex from 2026-2028 possibly totaling about US$206bn.

Analysis framework

The report combines pre-earnings investor interviews, buy-side expectation comparisons, Morgan Stanley profit modeling, supply-chain checks, process roadmap comparison, logic density comparison, capacity planning analysis, and residual income valuation modeling. The focus is not on a single quarter’s results alone, but on whether 3Q26 guidance, gross margin, capex, and advanced-node supply-demand support earnings expansion and valuation re-rating over the next two to three years.

Methodology notes

• Valuation methodsresidual income valuation model

  Derives a 12-month target price from assumptions on future earnings, cost of equity, and long-term growth.

  The report continues to use the residual income model to derive the NT$2,888 target price, with key assumptions including 9.2% cost of equity, beta of 1.2, 6.0% equity risk premium, 2.0% risk-free rate, 10.5% medium-term growth rate, and 4.0% terminal growth rate.

• scenario analysisRisk Reward

  Models stock risk-reward using bull, base, and bear scenarios.

  Bull-case target price is NT$3,480, base case is NT$2,888, and bear case is NT$1,590; key drivers include AI demand, advanced-node share, Intel/Samsung competition, gross margin, capex efficiency, and customer transistor costs.

• industry validationindustry checks and process roadmap comparison

  Validates technology leadership and supply-demand structure through supply-chain checks, EUV allocation, logic density, and capacity planning.

  The report compares process roadmaps and logic density among TSMC, Intel, and Samsung, combined with ASML EUV allocation and advanced packaging ramp-up, to judge that TSMC still maintains leading-edge process supply and pricing power.

Asset mapping & comparison

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

• TSMC (2330.TW)

  Core coverage name

  Strengths

  TSMC remains leading in 3nm and 2nm advanced nodes, AI and high-performance computing customers, EUV resources, advanced packaging, and logic density; revenue growth and pricing power are strong.

  Weaknesses

  Short-term gross margins may be pressured by offshore foundries, early-phase 2nm dilution, higher depreciation, and rising costs; market expectations of 70% gross margin may be too high.

  Comparison

  The report says Intel 18A is catching TSMC N3E on performance, and Samsung SF2 is catching TSMC N3P, but TSMC still leads in manufacturing execution, yield, and customer adoption.

  Risks

  Competition from Samsung Foundry and Intel Foundry may intensify, non-AI demand inventory normalization, rising costs at offshore foundries, 2nm demand below expectations, and customer transistor cost pressure in advanced nodes.

• ASML HOLDING NV

  Key equipment and EUV allocation monitoring proxy

  Strengths

  EUV tool allocation is an important external indicator for assessing TSMC’s advanced-node capacity and industry supply-demand dynamics.

  Weaknesses

  The report does not directly assess ASML fundamentals.

  Comparison

  ASML EUV allocation could influence global 2nm foundry supply and competitive structure in 2028.

  Risks

  If EUV allocation falls short of expectations, TSMC’s advanced-node expansion pace may be constrained.

• US.TSM

  TSMC ADR/US listing-related security

  Strengths

  Highly aligned with TSMC’s fundamentals and rating view.

  Weaknesses

  The report focuses on 2330.TW and does not provide separate valuation detail for US.TSM.

  Comparison

  Different listed vehicles for the same company.

  Risks

  In addition to company-level risks, it may be affected by ADR discount/premium and currency factors.

Key data

• RatingOverweightOverweight rating is maintained.
• Target priceNT$2,888.00Base-case target price, implying 20x P/E on 2027e EPS.
• Current priceNT$2,440.00The close date is 2026-07-13.
• Target price upside18%From the report cover rating summary.
• 3Q26 revenue expectationup 10%-15% QoQMorgan Stanley expectation, on a USD basis.
• 2026 full-year revenue growth expectationnear 40% YoYReport states full-year revenue growth has increased to high-30% Y/Y, near 40%.
• 3Q26 gross margin expectation67%-68%Morgan Stanley expectation, below the buy-side’s 69%-70% expectation.
• 2026 capex guidance expectationUS$56bnThe report expects 2026 capex guidance of US$56bn.
• 2026-2028 three-year capex expectationabout US$206bnThe report says management may not provide this three-year guidance.
• 2027 and 2028 capex outlookUS$75bn eachReflects advanced-node and early capacity buildout.
• 2nm capacity growthCAGR about 70% for 2026e-2028eTSMC indicates N2 capacity demand is very strong.
• 2027 advanced packaging capacity outlookCoWoS 200kwpm; SoIC 70kwpmMorgan Stanley’s 2027 year-end estimate of advanced packaging supply.
• 2027 advanced wafer price increase5%-10%The report believes TSMC can raise prices through leading-node value and EUV access advantage.

Impact & implications

The investment implication for TSMC is constructive: strong AI semiconductor demand, tight advanced-node supply, EUV priority allocation, and expansion in advanced packaging together support upward revisions to earnings and valuation rerating. In the near term, if 3Q26 gross margins come in below some buy-side expectations that were set too high, the stock may be volatile, but the report views such a pullback as a buying opportunity. For the semiconductor supply chain, ASML EUV allocation, global CSP capex, AI ASIC design demand, and Intel/Samsung foundry execution will serve as external signals to validate the persistence of TSMC’s growth.

Risks

• If 3Q26 gross margins come in below high market expectations, short-term stock volatility could occur.
• Competition from Samsung Foundry and Intel Foundry in leading-edge nodes could intensify, especially if Intel receives U.S. policy support.
• Weak smartphone demand in China and non-AI inventory correction could weigh on some consumer wafer demand.
• Offshore foundries and early ramp of advanced nodes may cause cost, depreciation, and gross margin dilution.
• If AI semiconductor demand or hyperscaler capex falls short of expectations, TSMC’s revenue and valuation rerating thesis would be pressured.
• If 2nm demand is weaker than expected due to high customer transistor costs, returns on advanced-node capacity expansion would be affected.
• If EUV allocation, advanced packaging capacity, or line conversion falls short, supply capability could be constrained.

What to watch

• TSMC’s official guidance on 3Q26 revenue and gross margin during the 2Q26 earnings call on July 16, 2026.
• Whether management raises 2026 revenue and capex guidance, and whether a 2026-2028 three-year capex outlook is provided.
• How TSMC addresses competition from Samsung Foundry and Intel Foundry.
• Whether 2027 wafer prices can rise by 5%-10% and how much that supports long-term gross margins.
• Whether TSMC includes AI CPUs and networking chips in its AI semiconductor revenue definition.
• Signals from ASML performance on EUV allocation and advanced-node equipment demand.
• Global CSP capex updates from Meta, Microsoft, and peers as validation of AI semiconductor demand.
• Progress on capacity conversion for CoWoS, SoIC, 2nm, 3nm, and 5nm.