Morgan Stanley keeps TSMC as Top Pick, target price unchanged at NT$2,288

Overview

This is a risk-reward update report on TSMC (2330.TW). Morgan Stanley updated its model to reflect preliminary 1Q26 revenue and expects 2Q26 revenue to still grow by mid-to-high single digits quarter over quarter on the back of a strong 1Q26. The report raises 2026e EPS by about 1%, keeps 2027-28e earnings forecasts broadly unchanged, and maintains a target price of NT$2,288.

Core views

The core view is that TSMC remains Morgan Stanley's Top Pick in Greater China technology semiconductors. The report believes that strong AI capex, leadership in advanced-process foundry, long-term gross margin expansion, and stronger pricing power will support more than 30% year-over-year revenue growth in 2026e and drive a rerating of the stock to an implied 20x 2027e target P/E.

Analysis framework

The report uses a risk-reward framework to assess TSMC across bull, base, and bear scenarios. The base-case target price comes from a residual income model and incorporates drivers such as AI semiconductor demand, advanced-node migration, customer outsourcing, gross margin, capex intensity, and the competitive landscape.

Methodology notes

• Valuation methodsResidual income model

  Base case target price

  The base-case target price uses a residual income model, with key assumptions including a 9.2% cost of equity, 1.2 beta, 2.0% risk-free rate, 6.0% equity risk premium, 10.5% mid-cycle growth, and 4.0% terminal growth.

• Scenario AnalysisRisk-Reward Framework

  Bull, base, and bear scenarios

  The report uses a NT$2,760 bull case, a NT$2,288 base case, and a NT$1,260 bear case to capture the valuation impact of advanced-node demand, market share, competition, and customer cost changes.

• Earnings ForecastMorgan Stanley ModelWare

  Earnings model update

  Unless otherwise stated, report metrics are based on the Morgan Stanley ModelWare framework; this model update mainly reflects preliminary 1Q26 revenue and the 2Q26 revenue outlook.

Asset mapping & comparison

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

• TSMC (2330.TW)

  Core coverage name, maintain Overweight and Top Pick.

  Strengths

  Leading logic foundry; market share leadership in 16nm, 7nm, 5nm, 3nm, and 2nm; strong AI-related demand; long-term gross margin expansion potential; stronger customer pricing power.

  Weaknesses

  High capex intensity in advanced nodes, limited reduction in transistor cost for 3nm and 2nm customers, and potentially significant cost increases at overseas fabs.

  Comparison

  Relative to potential competitors Intel and Samsung, the report sees TSMC as still holding a stronger position in leading-edge foundry, but also lists successful catch-up by those peers as a bear-case risk.

  Risks

  Semiconductor revenue growth excluding memory globally is weaker than expected in 2025-28, share losses in mature nodes hurt revenue, Intel contribution is below expectations, Intel foundry execution succeeds and intensifies order competition, or 2nm demand falls short of expectations.

• TSM.US

  TSMC ADR, corresponding overseas traded instrument of the same company.

  Strengths

  Benefits from the same AI semiconductor demand and advanced-node leadership thesis.

  Weaknesses

  ADR investors also need to consider exchange-rate movements, cross-market valuation differences, and U.S. trading sentiment.

  Comparison

  Fundamentals map to 2330.TW, but the trading market and investor base differ.

  Risks

  Also exposed to TSMC fundamental risks and may additionally face ADR market volatility.

Key data

• Target priceNT$2,288.00Unchanged.
• Bull caseNT$2,760.00Assumes more optimistic factors such as TSMC maintaining dominance in advanced process foundry and AI semiconductor demand exceeding expectations.
• Bear caseNT$1,260.00Assumes adverse factors such as erosion of foundry dominance, semiconductor growth below expectations, and stronger competition from Intel or Samsung.
• 2026e EPS revisionUp about 1%Reflects preliminary 1Q26 revenue and expectations for 2Q26 revenue growth of mid-to-high single digits quarter over quarter.
• 2026e revenue growth>30% Y/YThe report argues that strong earnings power and more than 30% year-over-year revenue growth in 2026e support the target price.
• Target P/E20x 2027e EPSThe report believes that stronger pricing power, long-term gross margin expansion, and sustainable AI semiconductor demand support a rerating to this implied multiple.

Impact & implications

For investment implications, the report positions TSMC as a key beneficiary of the AI semiconductor capex cycle and the migration to advanced nodes. If AI demand, advanced-node share, and gross margin resilience continue, rerating potential remains; however, if industry growth slows, inventories correct, overseas fab costs rise, or Intel/Samsung competition improves, the risk-reward profile would deteriorate materially.

Risks

• Global semiconductor revenue excluding memory grows more slowly than expected during 2025-28.
• Revenue misses expectations because share in mature nodes declines.
• Intel contribution is below expectations, or Intel and Samsung successfully develop leading-edge process technology.
• Intel foundry business executes successfully, creating order competition pressure on TSMC.
• 2nm demand falls short because customer transistor costs are too high.
• An inventory correction occurs in 2026.
• Overseas fab costs rise significantly.
• Advanced-node demand weakens, or AI semiconductor demand is below expectations.

What to watch

• Whether 2Q26 revenue achieves mid-to-high single-digit quarter-over-quarter growth.
• Whether AI capex guidance from major customers such as Meta and Microsoft continues to be revised up or remains strong.
• Whether TSMC can keep long-term gross margin above 56%.
• The pace of migration to 3nm and 2nm, customer transistor costs, and advanced-node ROI.
• Whether incremental Intel CPU outsourcing in 2025-27 exceeds expectations.
• Technology and order progress by Intel and Samsung in leading-edge foundry.
• Changes in overseas fab costs and capex intensity.