Goldman Sachs analyst Bruce Lu maintained a Buy rating on Taiwan Semiconductor Manufacturing Co (NYSE:TSM) with a price target of $254, up from $248.

Taiwan Semiconductor will host its fourth-quarter analyst meeting on Jan. 16. Lu expected another year of solid revenue growth in 2025E by 26.8% for Taiwan Semiconductor, following 29.4% revenue growth in 2024E (all in USD terms), driven by strong demand in leading-edge nodes mainly supported by continuous strong momentum from AI.

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The analyst also noted a more favorable competition landscape, with Samsung Electronics (OTC:SSNLF) foundry and Intel Corp (NASDAQ:INTC) foundry facing more difficulties as they move to more advanced nodes. Therefore, he modeled a mid-high single-digit price hike for 3nm and 5nm nodes and a 10%+ price hike for chip-on-wafer-on-substrate starting in 2025.

On the back of higher pricing, Lu now expects Taiwan Semiconductor’s gross margin to grow to 59.3% in 2025E versus 56.1% in 2024E. As for first-quarter of 2025E, the analyst now expects a stronger-than-normal seasonality quarter with a 2.2% sequential revenue decline (USD terms) versus an average 5% decline in the past 10 years, with gross margin staying at the same level as the fourth quarter of the 2024E at 58.9% in first-quarter of 2025E.

Lu noted the high possibility of Taiwan Semiconductor raising its long-term guidance. He said Taiwan Semiconductor could raise its profitability outlook and long-term revenue CAGR at its upcoming analyst meeting.

In Goldman Sachs’ Communacopia Conference, held Sept. 9-12, 2024, in San Francisco, Taiwan Semiconductor management guided that its revenue CAGR target of 15%- 20% could also extend to the next 5 years (versus the guided timeline of 2021-2026).

Lu noted this will be mainly supported by the continuous strength in leading-edge nodes and AI and HPC segments, the less intensified competition from other leading edge foundries. For profitability, the company is now projecting its long-term gross margin to be “53% and higher,” and with the new elevated pricing for 3nm and 5nm nodes and CoWoS commencing in 2025E, noted Taiwan Semiconductor will potentially raise the long-term gross margin target to “mid-50% and higher” range.

The analyst expected a higher capex of around $40 billion in 2025E, following a lower spend of around $30 billion in 2024E.

However, its capital intensity will remain at the mid-30%s level, which aligns with Taiwan Semiconductor’s guidance on capital intensity. Notably, most of the capex spent in 2025 will help expand 2nm and CoWoS.

Lu noted ongoing market concerns regarding the potential acceleration of U.S. capacity expansion and the potential acceleration of new node introduction after the U.S. presidential election. Notably, Taiwan Semiconductor plans for the second and third U.S. fab to enter mass production by 2028 and 2030.

The analyst sought updated comments from management on their U.S. expansion plans.

Lu noted that the industry faces overcapacity for mature nodes and that Taiwan Semiconductor’s 7nm node is still underutilized. However, Taiwan Semiconductor plans to expand mature nodes in Japan and Europe, and for its second fab in Japan, Taiwan Semiconductor will also expand 7nm.

Lu expects Taiwan Semiconductor to share the strategic considerations behind its decisions to pursue these greenfield capacity expansions despite potential overcapacity.

Taiwan Semiconductor aggressively expanded its CoWoS capacity in 2024 and will double its capacity again in 2025. The current end demand is highly concentrated in AI. Lu sought Taiwan Semiconductor’s view on potential new applications beyond AI, such as PCs or smartphones that will also adopt the CoWoS technology.

Lu tweaked his 2024E EPS estimate by 0.2% to factor in lower revenue from some mainland China customers, as Taiwan Semiconductor is taking a more conservative approach toward its shipment to mainland China customers. The analyst revised 2025E and 2026E EPS by 4.3% and 2.6%, mainly to factor in a stronger seasonality in the first quarter of 2025, driven by strong demand from AI and HPC.

Price Action: TSM stock is up 5.8% to $220.76 at last check Monday.

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