TSMC Customers Likely to Accept Price Increases

In its latest research report, Macquarie Securities pointed out that according to on-site inspections at the Taipei International Computer Show, the majority of major customers of TSMC's advanced nodes will agree to a higher price in exchange for reliable supply.

There have been rumors about TSMC's price increase for a long time.

Last month, media reports reported that TSMC plans to raise the price of 3nm by more than 5%, and it is expected that the price of advanced packaging will increase by about 10% to 20% next year.

TSMC's 3nm family members include N3, N3E, N3P, N3X, and N3A. Among them, the N3E, which started mass production in the fourth quarter of last year, targets application areas such as AI accelerators, high-end smartphones, and data centers. The N3P, scheduled for mass production in the second half of this year, is expected to become the mainstream of mobile devices, consumer products, base stations, and network applications by 2026. N3X and N3A are customized for high-performance computing and automotive customers.

Industry insiders point out that although AI accelerators do not adopt the most advanced manufacturing processes, they highly rely on advanced packaging technology. TSMC's advanced packaging capacity has always been relatively scarce, with its main customer Nvidia having the highest demand, accounting for about half of the production capacity. It is said that in order to gain more advanced packaging capacity, Nvidia is willing to raise prices, thereby widening the gap with competitors.

According to reports, in the face of insufficient production capacity, TSMC will launch new price increase negotiations in the second half of the year, mainly targeting 5nm and 3nm, as well as future 2nm processes. It is expected that the price increase decision will take effect as soon as 2025.

TSMC's earnings expected to climb year on year

In the report, Macquarie Securities pointed out that as TSMC creates value for customers, the bank believes the company will be able to increase pricing. Moreover, due to the majority of customers agreeing to increase the OEM prices, TSMC's future gross profit margin will continue to rise year by year.

According to Macquarie Securities, TSMC's gross profit margin is expected to climb to 55.1% in 2025 and approach 60% in 2026, reaching 59.3%. With the improvement of production efficiency this year, the gross profit margin has now increased to 52.6%.

With the long-term trend driven by AI and the continuous increase in gross profit margin, TSMC's compound profit growth rate (CAGR) is expected to reach 26% from 2023 to 2026. Macquarie Securities will also increase TSMC's earnings per share (EPS) for 2024-2026 by 5%, 2%, and 1%, respectively.

In addition, based on continuous investment in advanced processes, especially 3nm and 2nm, Macquarie has raised TSMC's capital expenditure estimates for 2025 and 2026 to $35 billion and $37 billion, respectively. Macquarie also predicts that by the end of 2024, TSMC's 2nm process will reach a monthly production capacity of 5,000 pieces, and by the end of 2027, the monthly production capacity will significantly expand to 90,000 pieces.

Based on the expectation of increasing profit prospects year by year, Macquarie Securities continues to maintain TSMC's "outperforming the market" rating and has raised its target price from NT$1,000 to NT$1,280, an increase of 28%.

Morgan Stanley also raised TSMC's target price on July 8th. In its latest report, the bank raised TSMC's target price from NT $1080 to NT$1,180, with a rating of "overweight".

TSMC will disclose its performance for the second quarter of the 2024 fiscal year on July 18th. Morgan Stanley stated that TSMC's performance and guidance for the second quarter will meet market expectations, and the pricing of its chips will be more positive.

Morgan Stanley expects TSMC to increase its revenue growth guidance for the third quarter to 13% month on month. In addition, Morgan Stanley has updated its guidelines for capital expenditures that the market is concerned about, from the original $28-32 billion to $30-32 billion.

Morgan Stanley also mentioned that it is expected that the demand for TSMC's SoIC 3D will be very strong, with Apple adopting it in the second half of next year and Nvidia adopting it in 2028.Last Thursday (July 4), TSMC closed 2.7% higher on the Taiwan, China stock market that day, with its share price exceeding NT $1000. Since the beginning of this year, the stock has risen by nearly 70%. TSMC also performed well in the US stock market. Last month, TSMC surpassed Berkshire Hathaway to become the 7th largest listed company in the US stock market by value.

At present, the target price given by major investment banks to TSMC is mostly above NT$1,000.

The target price set by HSBC for TSMC is NT$1,370, Goldman Sachs is NT$1,160, Citigroup is NT$1,150, Barclays is NT$1,096, JPMorgan Chase is NT$1,080, UBS is NT$ 1,070, and Bank of America is NT$1,040.