JPMorgan Chase: After the price increase, Taiwan Semiconductor's gross margin will rise to 50-60%, and dividends will also grow strongly

As the global semiconductor market continues to soar, Taiwan Semiconductor Manufacturing Company (TSMC) has been hinting at the possibility of raising prices, and market expectations have also been adjusted accordingly.

In a recent research report, JPMorgan Chase significantly raised its earnings per share forecast for TSMC in the coming years, increasing the company's target price from 980 New Taiwan Dollars to 1080 New Taiwan Dollars. The analysis in the report indicates that this is mainly based on the accelerated demand for data centers and artificial intelligence, especially the price increases in N3 and N5 process technologies, as well as the rise in prices for advanced packaging technology (CoWoS).

Citigroup analyst Laura Chen also raised her target stock price by 12% to 1150 New Taiwan Dollars.

At the time of writing, TSMC's stock price fluctuated between 940.00 New Taiwan Dollars and 950.00 New Taiwan Dollars, with a potential upside of approximately 14% to 21% from the expectations of JPMorgan and Citigroup.

Price Increases Expected to Drive Gross Margin to 50%-60%

Specifically, JPMorgan Chase raised its earnings per share expectations for TSMC in 2024, 2025, and 2026 by 3%, 9%, and 8% respectively.

The report predicts that starting from 2025, prices for N3 and N5 process technologies will see a slight increase ranging from 1% to 5%, while the price of CoWoS is expected to rise by about 10%.

It is pointed out in the report that with the optimization of product mix (increased proportion of N3E) and the increase in N3 production, TSMC's gross margin is expected to rise from the second half of 2025 to the first half of 2026, reaching a level of 50% to 60%.

We believe that with the strengthening of cyclical recovery, there is further room for gross margin improvement, as TSMC has upside potential in the application of N7 and older process nodes.

JPMorgan Chase predicts that TSMC's EBIT (Earnings Before Interest and Taxes) will continue to grow at a compound annual growth rate of 22% after 2024 until 2027. This indicates that TSMC's operational efficiency and profitability will continue to improve. By then, free cash flow will also increase significantly.

It is forecasted that TSMC plans to use 70% of its free cash flow to pay cash dividends. By 2027, TSMC's annual cash dividend is expected to reach 35 New Taiwan Dollars, with a compound annual growth rate of 36%. This means that the dividend will be more than twice the expected dividend in 2024.

Strong Growth Expected in the Artificial Intelligence Sector

TSMC's strength will also be reflected in its long-term strategic layout in the field of artificial intelligence.

JPMorgan Chase predicts that by 2028, TSMC's revenue from artificial intelligence is expected to account for 35% of its total revenue. Of this, 28% will come from the demand for artificial intelligence in data centers, and 7% from the demand for artificial intelligence in edge computing The report points out that Taiwan Semiconductor maintains a leading position in the field of AI chips, especially in the design advantages of N3, advanced packaging technologies (CoWoS and SoIC), and the N2/A16 process nodes, ensuring Taiwan Semiconductor's leading position in this rapidly growing market.

JPMorgan Chase's research report emphasizes that Taiwan Semiconductor almost monopolizes the AI accelerator and edge computing chip fields, with a strong process roadmap (N3 and N2) and industry-leading packaging technology, Taiwan Semiconductor is expected to continue to lead the market in the coming years.

Furthermore, it is expected that Taiwan Semiconductor will increase capital expenditures in the second half of 2024 and 2025, mainly for investment in N3, advanced packaging technologies, and the N2 process. Capital expenditures in 2024 are expected to reach approximately $31 billion, increasing to $35 billion in 2025.

The report indicates that these investments will further consolidate Taiwan Semiconductor's dominant position in the global semiconductor market and support its continuous development in emerging technology fields