Morgan Stanley: Tariff pressure on demand leads to a downgrade of Taiwan Semiconductor's target price and earnings forecast

According to the Zhitong Finance APP, JP Morgan has released a research report, lowering the target price for Taiwan Semiconductor (TSM.US) from NT$1,500 to NT$1,300, maintaining an "overweight" rating. Morgan Stanley predicts that driven by strong demand for N4/N5 and N3 processes, some urgent orders for older processes, and continuous growth in advanced packaging business, Taiwan Semiconductor's revenue in the second quarter of this year could grow by 5% to 8% quarter-on-quarter. However, under the impact of tariffs and global economic slowdown, the management of Taiwan Semiconductor may lower its revenue growth guidance for the fiscal year 2025 from about 25% to a mid-low range of 20%. Currently, Morgan Stanley predicts its annual revenue will grow by 23% (in USD terms).

In the past two months, several factors have been dragging down Taiwan Semiconductor's stock price, including the establishment of a joint venture with Intel (INTC.US), the impact of increased U.S. investment on profit margins, a slowdown in demand for artificial intelligence in data centers, and the impact of tariffs on end demand.

Morgan Stanley believes that Taiwan Semiconductor may reaffirm its long-term growth guidance for artificial intelligence in data centers (with a compound annual growth rate of about 45% by 2029), while also downplaying the impact of increased U.S. investment on incremental profit margins. Considering various scenarios, Taiwan Semiconductor may remain silent on the potential of the joint venture with Intel (which may still be an unresolved issue for the stock), while also taking into account the growth slowdown brought about by tariffs and the global economic slowdown.

Considering the weak growth in demand, Morgan Stanley has lowered its earnings per share forecast for Taiwan Semiconductor for the fiscal years 2025 to 2027 by 4%, 12%, and 4%, respectively. Morgan Stanley also pointed out that based on past downturn cycles, Taiwan Semiconductor's stock price has already reflected most negative factors, and if there are no further significant impacts on earnings per share, the stock price is expected to rebound by 20% to 25% in the short term.

In terms of financial reports, Morgan Stanley expects Taiwan Semiconductor's performance in the first quarter of 2025 to be basically in line with expectations, with a healthy guidance for the second quarter of 2025. Morgan Stanley expects the performance in the first quarter of 2025 to be within the guidance range, considering better-than-expected revenue and some additional costs related to earthquake interruptions. Looking ahead to the second quarter of 2025, Morgan Stanley expects Taiwan Semiconductor's quarter-on-quarter growth guidance to be 5-8% (Morgan Stanley's expectation is 7%), benefiting from the continued growth momentum of the N5 and N3 process series, as well as some urgent orders for older nodes due to a 90-day tariff suspension (excluding business in China). The demand trend for older process nodes has improved (with increased orders from mobile SoC suppliers such as MediaTek and UMC's N7 and N12, as well as some products from AMD), while there has been some decrease in demand from Intel. Overall, Morgan Stanley expects Taiwan Semiconductor's performance in the second quarter of 2025 to remain healthy, with profit margins in the range of 50% (possibly in the range of 58-60%, with Morgan Stanley's expectation being 58.9%), although the dilution from AZFab's growth is becoming increasingly significant.

Despite some tariff exemptions for certain projects, Morgan Stanley believes caution is still necessary. The tariff exemptions announced by the White House over the weekend for smartphones, personal computers, and other electronic products have eliminated the initial impact on these products (high tariffs from China), but the impact of slowing consumer demand in China and the U.S. on demand may still pose a risk in the second half of 2025 and 2026. Therefore, Morgan Stanley holds a more cautious attitude towards demand (especially in non-artificial intelligence areas, which should be affected more quickly) Morgan Stanley has lowered its revenue growth expectations for TSMC for the fiscal years 2025 and 2026 by 4% and 7%, respectively, now forecasting a year-on-year growth rate of only 23% and 13%.

Investment View

Due to its strong process roadmap (N3 and N2) and industry-leading packaging technology, JP Morgan expects TSMC's structural growth leverage to remain robust, as it holds an almost monopolistic position in AI accelerators and cutting-edge AI fields. However, due to tariffs and a global economic slowdown, Morgan Stanley believes TSMC may lower its revenue guidance for the fiscal year 2025 to take a more cautious view on end demand. Morgan Stanley also anticipates that weak demand growth will impact earnings per share, particularly in non-AI categories, with the most significant effects expected in 2026