10 key questions that investors are concerned about Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) by JP Morgan.

On March 27, J.P. Morgan released a research report stating that the stock price of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) listed in Taiwan Province of China has dropped 18% from its peak on January 22, 2025. Due to multiple concerns from investors about the growth of artificial intelligence, tariff impacts, and increased investment in Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR in the United States, the current trading price of the stock is 16 times and 13 times the earnings per share (EPS) expectations for fiscal years 2025 and 2026. In this research report, J.P. Morgan addressed some common questions from investors. At the same time, J.P. Morgan stated that they continue to have a positive outlook on the stock of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, and believes that the recent pullback provides an attractive buying opportunity. The firm maintains a "overweight" rating on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's stock, with a target price of 1500 NT dollars, representing nearly 57% upside from the closing price on March 27 (958 NT dollars). Below are some common questions from investors, and J.P. Morgan's answers to these questions. 1. How strong is the demand for advanced processes? J.P. Morgan believes that the demand for advanced processes remains very strong, especially for N4 and N5 processes (as many AI acceleration projects are using this node). Despite concerns about Apple Inc.'s iPhone demand, the firm has not seen any slack in demand for the N3 process, as early orders from companies like Qualcomm, AMD, Broadcom Inc., and Bitcontinent for high-performance computing (HPC) applications continue to drive demand growth. J.P. Morgan expects that revenue for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's N3, N4, and N5 processes will operate at full capacity through 2025, with N3 process revenue expected to grow by around 125% in 2025, and N4 and N5 process revenue also experiencing moderate growth (mainly due to a better product mix and increasing average selling prices in the first quarter of 2025). 2. Has Apple Inc. delayed adoption of the N2 process? J.P. Morgan points out that concerns about Apple Inc. delaying adoption of the N2 process have increased recently, but their research indicates that Apple Inc.'s plans have largely remained unchanged. The firm expects that Apple Inc. will adopt the N2 process in the second half of 2026 for its iPhone 18 series high-end models (potentially including Pro, Pro Max, and foldable versions). J.P. Morgan also notes that AMD may introduce some products based on the N2 process belonging to the Venice (Zen 6) series. The firm predicts that Bitcontinent will also have some demand for the N2 process by 2026. Qualcomm is trying to transition some products to the N2 process in 2026, but production of these products may be delayed until 2027. J.P. Morgan expects that by the end of 2026, N2 process capacity will reach around 60,000 wafers per month, and the lifecycle capacity for N2 and A16 processes will reach 175,000 wafers per month. However, the firm believes that A16 process may be a smaller node considering that many high-performance computing customers appear to prefer N2P over using GAA and back-side powered technology in the same process. Additionally, the firm believes that the price increase from N2 to A16 process (around 20-30%) may also be a reason for customer's lack of interest in A16 process. J.P. Morgan previously thought that NVIDIA Corporation would be the main customer for the A16 process, but now believes that NVIDIA Corporation may prefer to first adopt N2P and then move to A16. 3. How will the expansion of U.S. fabs affect profit margins? Can it be offset by higher pricing? J.P. Morgan believes that despite the expansion plans of U.S. fabs, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR can maintain a decrease in gross margin within the expected range of 200-300 basis points. The firm expects that Fab2 will start production by the end of 2026, Fab3 may start production in 2028 or early 2029, and other new factories may not start production until after 2030. By that time, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will have sufficient scale (at least 100,000 wafers per month in capacity) to benefit from economies of scale, and the supply chain ecosystem will be more mature than the current stage. J.P. Morgan also believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will strategically raise prices for advanced process nodes to offset rising overall costs. Their initial research suggests that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR may consider implementing a 20-30% price increase from N2 to A16 process. The firm previously expected NVIDIA Corporation to be the main customer for the A16 process, but now believes that NVIDIA Corporation may be more inclined to adopt N2P first and then move to A16. Overall, J.P. Morgan remains positive on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR and believes that the recent pullback in stock price presents a buying opportunity for investors.In early 2026, prices for advanced process nodes will be increased again. The bank also believes that, considering customers' demand for diversified production capacity and cost inflation across the entire contract manufacturing supply chain, pricing for advanced process nodes will continue to trend gradually upwards.4. How to view the future of Intel Corporation's outsourcing business? Earlier this month, Intel Corporation revealed that the company will continue to maintain about 30% of its wafer manufacturing reliance on external partners, mainly outsourcing to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. This is a positive change, as six months ago, Intel Corporation had planned to bring all wafer production back in-house. According to JP Morgan's research, future generations of PC CPU platforms after Panther Lake (expected to be released by the end of 2025) may primarily use Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's processes. For data center CPUs, there is currently no sign of outsourcing to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, but according to Intel Corporation's product manager Michelle Holthaus, outsourcing may also occur in the coming years. JP Morgan believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's current N2 process capacity plans do not take into account Intel Corporation's large orders, which may indicate room for growth in capacity planning and capital expenditure. 5. What is the supply and demand situation of CoWoS in 2025 and 2026? JP Morgan believes that even with recent adjustments, the capacity of CoWoS may still be very tight in 2025. The bank believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR may expand CoWoS capacity to 90,000-95,000 wafers per month by the end of 2026, while also focusing more on SoIC (Stacked Integrated Circuit) and Fan Out Panel (collaborating with ASE Technology Holding Co., Ltd. Sponsored ADR). Looking ahead to 2026, JP Morgan expects continued growth in NVIDIA Corporation's CoWoS demand, as well as possibly increased demand from new ASIC projects. Additionally, Apple Inc.'s use of WMCM (Wafer-level Multi-Chip Module) packaging for foldable iPhones may also consume more CoWoS supply. The bank currently predicts that by 2026, thanks to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's strong capacity expansion, CoWoS supply will reach a balance point for AI products. 6. How to view the demand ratio of GPU and ASIC? JP Morgan believes that GPU demand (NVIDIA Corporation and AMD) will still account for about 70% of total demand in 2025, a trend that may continue into 2026. Despite an acceleration of ASIC projects in 2025 and 2026, the bank believes that demand for ASICs may still be a small part of the market at least until 2027. 7. Will Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR participate in operating joint ventures with Intel Corporation's wafer fab? JP Morgan indicates that their basic expectation is that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is unlikely to participate in any joint ventures or "rescue plans" with Intel Corporation. This view is strengthened by Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's announcement to expand its US investment plan. The bank believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is more inclined to avoid managing other IDM (Integrated Device Manufacturing) factories, as this would bring operational challenges and potentially outweigh the benefits.In addition, the demand for management resources may be very high. In the view of the bank, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will only consider a joint venture agreement with Intel Corporation in very special circumstances or with very generous financial returns. The bank believes that even if Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR participates in any form of joint arrangement, financial indicators (such as a compound annual growth rate of 20% in the fiscal years 2024-2029, a gross profit margin exceeding 53%, and an ROE exceeding 25%) will remain stable.. What is the demand situation in non-AI fields? JP Morgan indicates that overall, the demand in non-AI fields has increased, especially in PC, server, and Android smartphone areas. However, demand in the industrial and automotive sectors remains weak, and the demand for Apple Inc. in the second half of 2025 may be lower than expected due to delays in Apple Inc.'s smartification process. The bank predicts that in the second half of 2025, there will be an increase in the utilization rates of N7 and N16 processes, and new SSD controllers, RF transceivers, and WiFi7 products will start ramping up production capacity. However, the capacity of non-advanced processes may still be below full capacity in 2025. So far, the bank believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will not shift N7 capacity to advanced process nodes, but due to continued weak demand, this is still something to watch. 9. How would Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR be affected if the US imposes tariffs on Taiwan or semiconductor exports? JP Morgan believes that direct tariffs on semiconductor exports from Taiwan to the US are unlikely to have a significant impact on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, as most of the company's products are exported to other regions. The key impact could be indirect tariffs imposed by the US on semiconductors imported from Taiwan (such as iPhone or NVIDIA Corporation server AI GPU chips). Although Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will not directly pay these tariffs, its end customers may need to bear these costs, which could affect end demand, especially in the consumer electronics sector. Given Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's strong commitment to increasing manufacturing investment in the US, the bank believes that specific tariff risks for the semiconductor industry are relatively low. 10. What are the views on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's capital expenditure for 2025 and 2026? JP Morgan believes that in 2025, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's capital expenditure may be maintained between 38 billion and 42 billion US dollars, considering the strong demand for N3 and limited opportunities to convert N5 to N3 (given the strong AI demand for N4). JP Morgan also expects that capital expenditure in 2026 will increase year-on-year, driven mainly by Intel Corporation's demand for the N2 process, the acceleration of the Arizona Fab 2 project, and possible early expenditure before the expiration of investment tax credits in the 2026 "chip act." Valuation and Risks JP Morgan believes that despite the many concerns about politics and tariffs regarding GEO Group Inc, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's market position means that it has pricing power to reduce the profit impact of these risks on its operations. The slowdown in AI capital expenditure remains a concern, but the bank believes that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is essentially immune to the debate between GPU and ASIC computing, data center AI, and edge AI as it supports high-end computing. The bank also believes that concerns about Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR being involved in Intel Corporation's "rescue plan" are exaggerated, as the company has always maintained shareholder-friendly management decisions. In the short term, uncertainty about AI capital expenditure may still exist, but overall AI capital expenditure will continue to grow healthily through 2026, and the supply of AI chips will remain tight. Key catalysts for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's stock include: 1) final determination on any tariffs issues regarding Taiwan or semiconductors; 2) confirmation of preliminary signs of price increases in 2026; 3) accelerated ramp-up of NVIDIA Corporation's Blackwell chips from the second quarter of 2025. JP Morgan maintains a "hold" rating on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, with a 12-month target price of 1500 New Taiwan dollars, based on approximately 20 times the 1Two-month forward P/E ratio, reflecting continuous improvement in gross profit margin - mainly benefited from strong capacity utilization of N3 and N5, price increases for advanced processes and packaging, and growing demand from a diversified customer base.JP Morgan also added that the main downside risks facing its stock rating and target price include: 1) Market share loss to Samsung's contract manufacturing business, as well as Intel Corporation's lower-than-expected wafer outsourcing ratio; 2) More intense competition in the contract manufacturing environment after 2025; 3) Slow recovery in capacity utilization at mature process nodes, leading to a lackluster semiconductor cyclical recovery.