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

In the latest research report, Citigroup raised the target stock price of Taiwan Semiconductor from the previously predicted NT$1030 to NT$1150, a 22% increase compared to 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 continuous expansion of its applications, Taiwan Semiconductor will benefit from the demand for chips in data centers and edge AI, especially in more advanced 2/3 nanometer process nodes.

Citigroup predicts that by the end of 2025, most of the global AI GPUs will transition to the 3 nanometer process, which will bring more orders to Taiwan Semiconductor, and the utilization rate of its 3 nanometer process is expected to remain tight next year.

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

Citigroup points out that most AI GPUs currently use 4/5/7 nanometer processes, and with the growth in demand for AI PCs and smartphones, combined 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, especially from customers such as Apple, Qualcomm, and MediaTek. By then, 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, and it may increase to $35 billion to $40 billion in 2025, with these substantial budgets mainly 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 in 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 a projected gross margin (GM) of up to 58% by 2025.

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

According to the latest technology roadmap, Taiwan Semiconductor plans to upgrade some of its 5-nanometer process equipment to 3 nanometers in the second half of 2024, despite facing tight supply situations with the 5-nanometer process.

At the same time, Taiwan Semiconductor is expected to further increase the capacity of CoWoS (advanced packaging) in 2025 to meet the strong demand for AI GPUs.

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

Citigroup and J.P. Morgan both raise Taiwan Semiconductor's target price

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

Citigroup expects that supported by AI chips, Taiwan Semiconductor'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 Taiwan Semiconductor and raised its target stock price from NT$1030 to NT$1150, expecting a 24.9% return on the stock price.

J.P. Morgan is also optimistic about Taiwan Semiconductor's prospects.

The bank believes that Taiwan Semiconductor's dominant position in the AI field, especially the accelerating demand in data centers and edge AI, will significantly boost its profitability Specifically, Morgan Stanley expects Taiwan Semiconductor's EPS for the years 2024 to 2026 to be NT$40.74, NT$56.30, and NT$63.65, respectively, with a 3%, 9%, and 8% increase from previous forecasts.

Morgan Stanley has raised the target stock price from NT$900 to NT$1080 and maintains an "overweight" rating