Q4 performance exceeded expectations, but investors are more concerned about "why TSMC is so aggressive."

``` TSMC’s Q4 financial report and guidance both exceeded market expectations, but investors’ attention has shifted from the results themselves to deeper strategic issues. Just days after announcing strong results, the world’s largest semiconductor foundry faces investor questions about its aggressive expansion strategy, including why it sharply raised its capital expenditure guidance and why it needs such an aggressive capacity layout. According to Chasing Wind Trading Desk, Morgan Stanley analysts including Charlie Chan pointed out in their latest research report that TSMC’s stock price rose 4% in the two trading days following the earnings report, but investors are now raising more strategic questions instead of just reacting to the results. Morgan Stanley believes that, in addition to strong AI semiconductor growth, potential supply tightness in equipment is also a reason for TSMC to aggressively secure equipment or expand capacity. Otherwise, if demand meets customer expectations in 2-3 years, TSMC could risk losing market share. Additionally, after TSMC reached a tariff agreement with the U.S. government, the market is focused on whether the company will further increase its U.S. investment. According to the agreement, Taiwan is required to directly invest $250 billion, with TSMC expected to contribute the majority. Aggressive Capital Expenditure: All-out Effort to Maintain Market Share TSMC’s 2026 capital expenditure guidance reaches $52 to $56 billion, about $6 to $11 billion higher than market expectations. This aggressive investment plan has sparked widespread market discussion. Morgan Stanley believes that, in addition to strong AI semiconductor growth, the possibility of tight supply of equipment is a reason for TSMC to aggressively reserve equipment or expand capacity. Otherwise, if demand meets customer expectations in 2-3 years, TSMC could face the risk of losing market share. Analysts point out that TSMC is accelerating infrastructure building, including, but not limited to, new advanced packaging plants AP9 and AP10 on newly acquired land in the U.S. Even if $1 to $2 billion is added to infrastructure capex, the revised capex guidance still appears aggressive. Therefore, it is possible TSMC will prepay some equipment, smoothing out capex for 2026 and 2027. Notably, TSMC’s capital intensity is expected to drop sharply as revenue surges. Although 2026 capex will hit a record high, as capacity comes online in 2027-2028, capex as a percentage of revenue will drop significantly. Capacity Expansion and Improved Production Efficiency TSMC’s 2026 revenue guidance suggests nearly 30% year-over-year growth, exceeding market expectations, mainly attributed to improved production efficiency. Analysts attribute the higher guidance to improvements in production efficiency, with TSMC driving more wafer output to meet customer demand. Analysts do not expect the company to increase wafer prices mid-year. TSMC raised its long-term gross margin guidance from 53% to 56% or higher, reflecting the company’s confidence in AI opportunities and the sustainability of production efficiency improvements. Morgan Stanley expects that even if capex increases, TSMC can easily achieve gross margins above 56%. The company’s strategy to improve margins should be sustainable, including increased production efficiency, consolidated mature node manufacturing, and outsourcing low-margin business. As such, analysts have raised their 2026 gross margin assumption to 63%. Core Catalyst: AI Demand Drives Future Growth The next step investors are most focused on revolves around the AI market. Morgan Stanley believes the following factors will become the key drivers for TSMC’s share price: Global cloud service provider capex guidance: 2026 global cloud service provider (CSP) capex guidance will directly impact TSMC’s order visibility. Management has already communicated directly with global CSPs, confirming that chip supply, not electricity supply, is the real bottleneck. AI semiconductor TAM expansion: Morgan Stanley predicts the total addressable market for global AI semiconductors will grow from current levels to $550 billion in 2029. AI semiconductors already account for a high-teen percentage of TSMC’s total 2025 revenue, expected to reach 20-25% in 2026. Nvidia GTC Conference: The Nvidia GTC Conference, to be held in March, will provide important guidance for AI chip demand and may further validate TSMC’s aggressive capacity expansion strategy. AI customer quarterly results: The financial reports of key AI customers will directly affect the market’s judgment on the sustainability of AI semiconductor demand, which is vital for TSMC to maintain high capex intensity. TSMC has raised its AI semiconductor revenue growth forecast from 45% to a 55-59% compound annual growth rate (2024-2029), close to Morgan Stanley’s 60% estimate. The company raised its overall revenue growth outlook from 20% to 25% (2024-2029 CAGR). Management communicated directly with global cloud service providers in the earnings call, confirming that chip supply, not electricity, is the bottleneck. Analysts believe AI semiconductors already account for a high-teen percentage of 2025 revenue, and considering their growth exceeds the company’s average, it is possible for the percentage to climb to 20-25% in 2026. Even assuming mild growth in PC and smartphone semiconductors, and 30-40% growth in general servers and networking, it is reasonable to expect “AI semiconductor revenue to nearly double.” On U.S. investment, based on the U.S.-Taiwan tariff agreement, $250 billion in direct investment is required, with TSMC expected to contribute much of it. A year ago, the company announced plans to invest $165 billion in the U.S. by 2030, with 30% of its 2nm and below capacity to be located in the U.S. Analysts believe TSMC will accelerate U.S. capacity expansion to meet customer demand, and the company has mentioned purchasing larger land in Arizona during its earnings call. According to TrendForce, the new site may add five wafer fabs, as well as new advanced packaging plants AP9 and AP10. Top Pick: Target Price NT$2,088 TSMC is maintaining its leading position in advanced process foundry, and management is very confident about its market share trend. Regarding foundry competition, management says it takes years for advanced process foundry services to mature, and TSMC is confident about its market share trend. Analysts believe that reflecting strong AI capex guidance, TSMC remains their top pick. In terms of valuation, TSMC stock is currently priced at 15 times analysts’ 2027 EPS estimate, close to the 16.5 times average forward P/E since 2018. Analysts find this level highly attractive. Morgan Stanley continues to use a residual income valuation approach and derives a 12-month target price of NT$2,088. Key assumptions include a cost of equity of 9.2% (beta of 1.2, risk premium of 6.0%, risk-free rate of 2.0%), a medium-term growth rate of 10.5%, and a terminal growth rate of 4%. Analysts point out that reflecting improved bargaining power, long-term gross margin expansion, and sustainable AI semiconductor demand, the stock is expected to re-rate to an implied 2027 target P/E of about 19 times. TSMC dominates the foundry services sector, benefits from breakthroughs in EUV technology and materials, new technology trends such as AI-driven global semiconductor revenue growth, and increased demand for leading process nodes. ~~~~~~~~~~~~~~~~~~~~~~~~ The above content is from Chasing Wind Trading Desk. For more in-depth interpretation, including real-time interpretation and first-hand research, please join [Chasing Wind Trading Desk ▪ Annual Membership] Risk Warning and Disclaimer The market involves risks, and investment must be prudent. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Investing based on this is at your own risk. ```