Where does TSMC's "confidence" come from? Citi: AI GPUs will shift to 3nm process on a large scale by the end of next year

During the critical development period of AI technology, the two top investment banks on Wall Street, Citigroup and Morgan Stanley, have both raised the target price of Taiwan Semiconductor, the chip manufacturing giant.

In the latest research report, Citigroup raised the target stock price of Taiwan Semiconductor from the previous forecast of NT$1030 to NT$1150, a 22% increase from the current stock price, while Morgan Stanley raised its target price from NT$900 to NT$1080, maintaining an "overweight" rating.

Both investment banks believe that with the rapid development of AI technology and the expanding applications, Taiwan Semiconductor will benefit from the chip demand in data centers and edge AI, especially in more advanced 2/3 nanometer process nodes.

Citigroup predicts that by the end of 2025, most AI GPUs globally will transition to the 3 nanometer process, bringing more orders to Taiwan Semiconductor. The utilization rate of the 3 nanometer process is expected to remain tight next year.

Citigroup: AI GPUs to Shift to 3nm Process by End of Next Year

Citigroup points out that most AI GPUs currently use 4/5/7 nanometer processes. With the growth in demand for AI PCs and smartphones, coupled with the gradual maturity of chip manufacturing technology, it is expected that most of them will transition to the 3 nanometer process by the end of 2025.

As a leader in advanced semiconductor technology, Taiwan Semiconductor is expected to receive more 3 nanometer chip orders in 2025, particularly from customers such as Apple, Qualcomm, and MediaTek. At that time, the utilization rate of Taiwan Semiconductor's 3 nanometer process will remain tight.

Taiwan Semiconductor has previously stated that it expects capital expenditures in 2024 to be between $28 billion and $32 billion, with a potential increase to $35 billion to $40 billion in 2025. These substantial budgets will mainly be used for the research and production of 2/3 nanometer processes.

Given the bright prospects of cloud computing and edge AI demand, the revenue-generating capability of advanced processes is even stronger.

Citigroup predicts that the average selling price of advanced processes (3/4/5 nanometers) may increase by 5%-10% in 2025.

Furthermore, the proportion of revenue from advanced processes to Taiwan Semiconductor's total revenue is expected to reach 53% and 61% in 2024 and 2025, respectively. If the prices of these chips increase by 5-10% in 2025, Taiwan Semiconductor's revenue could rise by about 3-6%.

Citigroup's research focuses more on Taiwan Semiconductor's pricing power and its ability to pass on cost increases, with the gross margin (GM) expected to reach 58% in 2025.

Morgan Stanley, on the other hand, points out that Taiwan Semiconductor holds an almost monopolistic position in the chip market related to cloud computing and edge AI. By 2028, AI-related revenue is expected to account for 35% of total revenue (28% from cloud computing and 7% from edge AI)

According to the latest technology roadmap, Taiwan Semiconductor Manufacturing Company (TSMC) plans to upgrade some of its 5-nanometer process equipment to 3-nanometer in the second half of 2024, despite facing tight supply of the 5-nanometer process.

Additionally, TSMC is expected to further increase the capacity of CoWoS (Chip-on-Wafer-on-Substrate) in 2025 to meet the strong demand for AI GPUs.

With the increase in chip size, the complexity of 3D IC architecture, and the improvement in yield control, Citigroup predicts that the prices of TSMC's advanced packaging business will also rise.

Citigroup and JP Morgan Raise TSMC's Target Price

According to earlier reports, TSMC may raise the prices of wafers for its 3-nanometer and 5-nanometer processes. NVIDIA CEO Jensen Huang also expressed willingness to pay more to TSMC at Computex.

Citigroup predicts that supported by AI chips, TSMC's revenue growth rates in 2025 and 2026 will be 39% and 31% year-on-year, with a projected revenue growth of 29% in 2024.

Citigroup reiterated its "Buy" rating on TSMC and raised its target stock price from NT$1030 to NT$1150, expecting a return rate of 24.9%.

JP Morgan is also optimistic about TSMC's prospects.

The bank believes that TSMC's leading position in the AI field, especially the accelerating demand in data centers and edge AI, will significantly boost its profitability.

Specifically, JP Morgan expects TSMC's EPS for 2024 to 2026 to be NT$40.74, NT$56.30, and NT$63.65, respectively, representing a 3%, 9%, and 8% increase from previous forecasts.

JP Morgan raised its target stock price from NT$900 to NT$1080 and maintained an "Overweight" rating