AI chip foundry "bursting with orders"! "Foundry King" TSMC's Q2 sales exceeded expectations, soaring by 40%!

According to the Smart Finance app, boosted by the artificial intelligence boom, Taiwan Semiconductor (TSM.US) exceeded market expectations for second-quarter sales. Data released by Taiwan Semiconductor on Wednesday showed that the company's net revenue in June was NT$207.9 billion, meaning second-quarter net revenue reached NT$673.5 billion, a year-on-year increase of 40%, higher than the market's average expectation of 35.5%.

On Monday, Taiwan Semiconductor's US stock price briefly hit a record high of $192.8, surpassing the trillion-dollar mark in market capitalization. Wall Street analysts pointed out that the strong demand for advanced process chips driven by the artificial intelligence boom will boost Taiwan Semiconductor's bargaining power. Top Wall Street investment banks such as Citigroup, Goldman Sachs, and Morgan Stanley have raised their target stock prices for Taiwan Semiconductor as a result.

With decades of semiconductor manufacturing technology accumulation in the chip manufacturing field, Taiwan Semiconductor has been at the forefront of chip manufacturing technology improvement and innovation globally (pioneering the FinFET era, leading the 2nm GAA era). It leads the world's chip manufacturers with advanced processes and packaging technologies, as well as high yields, dominating the vast majority of global chip foundry orders, especially for 5nm and below advanced process chip foundry orders.

Currently, Taiwan Semiconductor, with its leading 2.5D/3D chiplet advanced packaging, has secured almost all high-end chip packaging orders for 5nm and below processes in the market. The advanced packaging capacity is far from meeting demand, with shortages in NVIDIA's H100/H200 due to limitations in Taiwan Semiconductor's 2.5D CoWoS packaging level. According to Wall Street analysts' expectations, starting from the second half of 2024, driven by demand for NVIDIA's GB200 and AMD's new MI325 series, 3nm and below advanced processes will continue to bring significant revenue contributions to Taiwan Semiconductor. The price growth of 3nm and below processes and advanced packaging foundry services from next year onwards will help accelerate revenue growth in 2025 and the following years.

Morgan Stanley pointed out in its latest report that based on supply chain checks, most of Taiwan Semiconductor's customers have agreed to raise foundry prices in exchange for reliable supply, which will further drive up Taiwan Semiconductor's gross margin. Analysts estimate that Taiwan Semiconductor's gross margin will climb to 55.1% in 2025 and approach sixty percent in 2026, reaching 59.3%.

Industry insiders analyze that this price increase may be based on a comprehensive consideration of market demand, capacity, and costs. It is reported that major companies such as Apple (AAPL.US), Qualcomm (QCOM.US), NVIDIA (NVDA.US), and AMD (AMD.US) have already placed large orders for Taiwan Semiconductor's 3nm family process capacity, and the phenomenon of customers queuing up is expected to continue until 2026 TSMC is still the core chip manufacturer for Apple, NVIDIA, AMD, Broadcom, and other fabless chip design companies, especially for the data center server-side AI chips manufactured for NVIDIA and AMD. These chips are considered crucial hardware infrastructure for driving large-scale artificial intelligence training/inference systems behind tools like ChatGPT, with no rivals.

Research firm Gartner predicts that the development of generative AI and LLM will comprehensively drive the deployment of high-performance servers based on AI chips in data centers. The firm forecasts that the global AI chip total revenue scale will reach approximately $71 billion in 2024, a significant increase of 33% from 2023, and is expected to reach $92 billion in 2025. Citigroup on Wall Street predicts that AMD's flagship AI chip MI300X will capture about 10% market share in 2024, with TSMC also being the exclusive chip manufacturer for AMD. All these indicate the unparalleled importance of TSMC in providing manufacturing services for top chip companies.

Driven by the artificial intelligence boom, Taiwan, China has exported GPU and related equipment worth over $42 billion in the past year. The latest data shows that Taiwan, China's export total for GPUs and related equipment in June was $3.5 billion, an increase of nearly 422% compared to the same period last year; Taiwan, China's total exports in June increased by 23.5% year-on-year, reaching nearly $40 billion.

Gary Ng, Senior Economist at BNP Paribas, said, "Taiwan, China continues to benefit from the artificial intelligence boom and the cyclical rebound in the technology industry, which may support exports in the coming months."

Wall Street Bullish! TSMC Stock Price Expected to Continue Rising

With decades of semiconductor manufacturing technology accumulation in the chip manufacturing field, TSMC has been at the forefront of chip manufacturing technology improvement and innovation for a long time (ushering in the FinFET era, leading the 2nm GAA era). With leading-edge manufacturing processes and packaging technologies globally, as well as extremely high yield rates dominating the vast majority of global chip manufacturing orders, especially for 5nm and below advanced process chip manufacturing orders. According to Wall Street analysts' expectations, starting from the second half of 2024, driven by the demand for NVIDIA's GB200 and AMD's new MI325 series, the 3nm and below advanced process will continue to bring significant revenue contributions to TSMC. The comprehensive price increase for 3nm and below process and advanced packaging manufacturing from next year onwards will help accelerate revenue growth in 2025 and the following years.

In a recent report by Macquarie Securities, it was revealed through the supply chain survey that most customers have agreed to price increases for manufacturing to ensure stable supply, which will further drive TSMC's gross margin increase. Analysts predict that by 2025, TSMC's gross margin will climb to 55.1%, and by 2026, it is expected to approach sixty percent, reaching 59.3% Industry insiders analyze that this price increase may be based on the extremely strong market demand, TSMC's production capacity constraints, and cost considerations. Major TSMC clients such as Apple and NVIDIA have already made large-scale bookings for TSMC's 3nm process capacity, and the queue for customer 3nm foundry contracts is expected to continue until 2026.

According to the Taiwan Business Times, next year's TSMC 3nm foundry pricing may increase by more than 5%, with advanced packaging such as CoWoS representing chiplet experiencing a price increase of 10%-20% next year. At the shareholders' meeting on June 4th, TSMC's newly appointed Chairman and CEO, Wei Zhejia, clearly indicated TSMC's intention to raise prices. Wei Zhejia also revealed at the June 4th shareholders' meeting that almost all AI chips on the market are manufactured by TSMC.

Top Wall Street investment banks have recently raised their target stock prices for TSMC, with the core logic being the surge in demand for AI chips brought about by artificial intelligence, as well as the significant increase in prices for 3nm-level processes and advanced packaging foundry services that may lead to substantial profit growth and valuation by 2025.

Given the growing profit prospects year by year, and the majority of TSMC's clients agreeing to raise foundry contract prices in exchange for stable and reliable chip supply, it is expected to drive future gross profit margins to increase year by year. Macquarie not only maintains its "outperform the market" rating for TSMC but also significantly raises the target price for TSMC's Taiwan-listed shares by 28% to 1280 New Taiwan Dollars. As of Wednesday, TSMC's Taiwan-listed shares closed at 1045 New Taiwan Dollars.

In its latest research report, Citigroup has raised its target stock price for TSMC from the previously predicted 1030 New Taiwan Dollars to 1150 New Taiwan Dollars, well above the current price of TSMC's Taiwan-listed shares. Citigroup predicts that as AI large model technology rapidly develops and its application scope continues to expand, TSMC will fully benefit from the strong demand for chips in data centers and edge AI, especially in more advanced 3nm, 2nm, or below chip manufacturing processes.

Citigroup predicts that by the end of 2025, most global server AI accelerators, including NVIDIA's new AI GPUs, will migrate to the 3nm process, and even some may attempt TSMC's more expensive 2nm or 1.8nm processes, which will bring larger orders to TSMC. The utilization rate of TSMC's 3nm chip manufacturing process is expected to remain in short supply at least until 2025. Citigroup predicts that the average foundry price for TSMC's advanced manufacturing processes (i.e., below 5nm) may increase by 5%-10% in 2025.

Analysts at Goldman Sachs expect prices for TSMC's 3nm and 5nm chip manufacturing to increase by "single-digit percentages," and have raised their 12-month target price by 19% to 1160 New Taiwan Dollars. Goldman Sachs analysts, including Bruce Lu, wrote in a report on Tuesday: "We now see that, as positive sentiment around artificial intelligence continues to rise, TSMC's risk-return profile is very attractive." "As the scale of artificial intelligence applications continues to expand, we believe TSMC is one of the most core beneficiaries." In addition, Goldman Sachs gave Taiwan Semiconductor's US stock ADR a target price as high as $218 (Taiwan Semiconductor's US stock ADR latest closing price $184.52)