TSMC's new "golden era" is coming? Goldman Sachs: Advanced packaging becomes the second growth engine, a 60% gross margin may be the "new normal"

According to news from the "Chasing the Wind Trading Desk," Goldman Sachs’ Bruce Lu team released the latest research report on TSMC on the 15th, significantly raising future growth and profit targets, believing the company is entering a new multi-year growth cycle driven by AI. Goldman Sachs raised the 12-month target price from NT$2,330 to NT$2,600, maintaining its Buy rating and Asia-Pacific confidence list status.

TSMC provided an unexpectedly strong business outlook at the Q4 analyst meeting held on January 15. The company raised the five-year compound annual growth rate (2024-2029) for AI accelerator-related revenue from the previous mid-40% to mid-to-high 50%, and raised the overall five-year compound annual revenue growth rate target from 20% to nearly 25%. Management said that the supply-demand imbalance driven by AI remains unresolved, advanced process capacity remains tight, and Goldman Sachs expects this gap to persist until 2027.

In terms of profitability, TSMC raised its long-term gross margin target from "53% and above" to "56% and above." The actual Q4 gross margin reached 62.3%, beating market expectations. Although ramping up overseas capacity is expected to dilute gross margin by 2-3 percentage points in 2026, improved production efficiency will directly contribute to profits. Goldman Sachs expects gross margins in 2026/2027 to reach 63.2%/64.0%, much higher than 2025’s 59.9%.

Additionally, advanced packaging is becoming TSMC’s second growth engine. Management expects this business’s revenue share to reach 8% in 2025, rising to just over 10% in 2026, and that its growth rate over the next five years will likely exceed the company’s overall growth rate. Driven by this, Goldman Sachs raised its earnings per share forecasts for 2026-27 by 11-12%.

AI Demand Drives New Growth Cycle

TSMC has significantly raised its long-term growth expectation for the AI business. Management now expects AI accelerator-related revenue to grow at a mid-to-high 50% compound annual growth rate between 2024 and 2029, a notable increase from the previous mid-40%. This adjustment brought the company’s overall five-year compound annual revenue growth rate target (in USD) from 20% to nearly 25%.

Management stressed the sustainability of this growth trend. Cloud service providers are achieving tangible financial returns from AI investments, and financial conditions remain healthy. Goldman Sachs continues to view AI as TSMC’s multi-year growth engine, anticipating the supply-demand imbalance to persist until 2027 as exponential growth in token consumption keeps chip demand outpacing supply, with new capacity from the current capital cycle coming online in 2028/2029.

Goldman Sachs expects utilization rates for N3/N5 processes to stay tight driven by strong AI demand and ongoing production efficiency improvements. The firm now forecasts TSMC revenue (USD) to grow 34.5%/27.4% in 2026/2027, further raised from the previous estimate of 30.4%/28.0%.

Capital Expenditure Enters New Upcycle

TSMC’s capital expenditure guidance for 2026 exceeded market expectations, becoming another key focus. The company guided 2026 capex to be $52-56 billion, significantly higher than 2025’s $40 billion, exceeding Goldman Sachs’ previous $46 billion and the market’s consensus of ~$50 billion.

Goldman Sachs attributed this above-expectation guidance to some equipment investments being moved up from 2027 to 2026, and increased infrastructure spending. Management also stated that capex for the next three years would be significantly higher than the $101 billion over the past three years, reflecting higher capital intensity of the N2 process and sustained robust customer demand.

Based on the raised long-term AI growth trajectory, Goldman Sachs raised its 2026/2027 capex forecasts to $56 billion/$65 billion (previously $46 billion/$54 billion), up 37%/16% YoY, respectively.

Gross Margin Above 60% Becomes New Normal

TSMC’s profitability reached record highs. Q4 gross margin hit 62.3%, up 280 basis points quarter-on-quarter and 330 basis points year-on-year, beating both Goldman Sachs and Bloomberg consensus of 60.7%/60.6%. Guidance for Q1 gross margin is further raised to 63-65%, far above Goldman Sachs and market expectations of 59.6%.

This strong performance is thanks to better-than-expected manufacturing improvements and production efficiency. Management raised the long-term gross margin target from "53% and above" to "56% and above." Goldman Sachs expects that, even under high-cost environments, gross margin levels above 60% will become the new normal.

Although the N2 process is set for rapid ramp up in H2 2026, management expects this to dilute full-year gross margin by 2-3 percentage points, but the dilution from overseas factories is less than expected, and ongoing improvements in manufacturing efficiency will directly boost profits. Goldman now forecasts 2026/2027 gross margin to reach 63.2%/64.0%, a significant increase from the previous 60.4%/60.6%, with H2 gross margin slightly lower due to N2 dilution.

Advanced Packaging Becomes Second Growth Engine

Advanced packaging is evolving into another growth engine for TSMC. Management guidance sees advanced packaging business revenue share at 8% in 2025, rising to just over 10% in 2026, and expects its growth rate over the next five years to surpass the company’s overall average.

Goldman Sachs refined its CoWoS shipment forecasts, now projecting 1.197 million/2.171 million wafers in 2026/2027 (previously 1.185 million/2.195 million), up 90%/81% YoY, with capacity forecast unchanged at 1.275 million/2.31 million wafers. The firm expects CoWoS revenue to grow 102.5%/81.2% YoY in 2026/2027, with revenue share rising to 11.7%/16.7%.

TSMC will allocate 10-20% of 2026 capex to advanced packaging, testing, photomask manufacturing, etc., with total capex expected to grow 37% YoY in 2026. Goldman Sachs believes semiconductor equipment suppliers will fully benefit from the accelerated expansion of CoWoS and broader advanced packaging technologies.

Strong Performance Drives Valuation Upgrade

TSMC’s Q4 results beat expectations across the board. Revenue reached NT$1,046.09 billion ($33.73 billion), up 5.7% QoQ and 20.5% YoY, beating company guidance and market expectations. EPS was NT$19.50, up 11.8% QoQ and 35.0% YoY, exceeding both Goldman Sachs and market expectations. Gross margin of 62.3% and operating margin of 54.0% both surpassed expectations.

For Q1, management guides revenue of $34.6-35.8 billion (based on NT$/USD exchange rate of 31.6), up 4% QoQ, gross margin of 63-65%, and operating margin of 54-56%. Revenue guidance is stronger than Goldman Sachs’ expected 1.8% QoQ growth, and margin guidance is significantly above its expected 59.6%, mainly benefiting from higher capacity utilization and ongoing cost efficiency improvements.

Based on performance upgrades, Goldman Sachs raised its EPS forecasts for 2025/2026/2027 by 2.4%/10.8%/11.6%, and its 12-month target price from NT$2,330 to NT$2,600, based on a 22x 2027E P/E (unchanged). For ADRs, the target price was raised from $466 to $520. Goldman Sachs maintains its Buy rating, with the target price offering a 54% upside from current stock prices.

Goldman Sachs emphasizes that TSMC’s solid technological leadership and execution ability put it ahead of peers in capturing the industry’s long-term structural growth opportunities, especially in AI. The firm believes the company’s outlook for achieving a compound annual revenue growth rate of 25% in coming years is clear, driven primarily by rising chip content and strong AI/HPC demand, with long-term gross margin sustained above 56%.

As of publishing, TSMC’s stock price rose 2.96% to NT$1,740.

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