TSMC stock target raised at Morgan Stanley on margins strength

Investing.com -- Morgan Stanley raised its price objective on Taiwan Semiconductor Manufacturing after the chipmaker delivered another blowout quarterly report and an upside surprise in capital spending as it signalled accelerated investment to support sustained AI-driven demand

The bank lifted its price target by 5% to NT$2,088 and reiterated the stock as a top pick, citing upside to gross margins and stronger earnings visibility, and raised its EPS estimates by 8% for 2026 and 7% for 2027.

The key takeaway from management discussions was that chip supply, not power availability, remains the main bottleneck for AI developers, analysts led by Charlie Chan said in a note.

TSMC has been in direct communication with global cloud service providers (CSPs), the analysts said, noting that customers remain bullish on AI returns. The company estimates that AI adoption could lift productivity by 1–2%, translating into “additional profits of US$1bn–2bn p.a," the analysts said.

Gross margin was the central factor behind the price target increase. TSMC’s fourth-quarter gross margin came in at 62.3%, well ahead of both guidance and expectations, while first-quarter 2026 margins are guided at 63–65%.

Analysts said the company’s decision to lift its long-term gross margin target to 56% and above reflects current margins already running far above the prior 53% level, supported by pricing actions, productivity improvements and a higher contribution from AI-related revenue.

Capital spending outlook was another highlight of the report. TSMC guided for $52–56 billion of capex, above Morgan Stanley’s prior forecast, as it accelerates fab expansion and absorbs higher tool costs at advanced nodes.

The bank now expects capex of around $54 billion in 2026 and $59 billion in 2027, reflecting "more infrastructure capex for new fabs" and "higher capex per k capacity."

On the demand side, analysts said management remains constructive on high-end smartphones and PCs, while AI remains the dominant growth engine. TSMC raised its AI semiconductor revenue growth assumption for 2024–2029 to 55–59% from 45%, while lifting its overall corporate revenue CAGR outlook to 25%.

Trading at around 15x Morgan Stanley’s 2027 earnings estimate, analysts see TSMC shares as "extremely attractive" relative to its historical average "and believe it will attract more fund flows."

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