TSMC will release its third-quarter earnings report on Thursday. Bank of America Merrill Lynch expects TSMC's third-quarter revenue to exceed expectations, with the strong ramp-up of the 2nm process being the core driver. On the eve of the earnings release, it raised its target price and maintained its buy rating.
According to the trading desk, in a research report released by Bank of America Merrill Lynch on October 12, analyst Haas Liu raised his target price for TSMC US shares (TSM) from $590 to $620 (and his target price for TSM shares from NT$3,100 to NT$3,260), and raised his earnings per share forecast for 2026 to 2028 by 2% to 9%.
The core logic behind this increase is:The accelerated ramp-up of the 2nm process has driven higher-than-expected demand for Apple mobile SoCs and AMD server CPUs. Coupled with the migration of multiple GPU and ASIC products to 3nm, this has pushed third-quarter revenue above the upper limit of the guidance range and laid the foundation for sales growth in the fourth quarter.
Bank of America expects TSMC's revenue to grow by 10% to 15% quarter-over-quarter in the fourth quarter, and is expected to achieve year-over-year growth of over 40% for the full year, in line with the company's previous guidance. At the same time, despite cost pressures from the ramp-up of 2nm production capacity and the expansion of overseas wafer fabs,Bank of America expects gross margins to remain at 67.0% and 67.8% in the third and fourth quarters, respectively, lower than the market's recent optimistic expectations of 67% to 69%, but overall profit margin resilience remains outstanding.TSMC's U.S. stock price has risen by more than 48% year-to-date, and Bank of America's latest target price still implies an upside potential of about 37% compared to the current stock price.
Third-quarter revenue is expected to exceed expectations, with 2nm ramp-up being the key driver.
According to a Bank of America Merrill Lynch research report, TSMC's third-quarter revenue is expected to grow by 18% quarter-over-quarter in New Taiwan dollars, higher than Bank of America and market expectations of 14% and 13%, respectively. Converted at an average exchange rate of NT$31.99 to US$1, third-quarter USD revenue may reach US$46.67 billion, exceeding the company's guidance range of US$44.6 billion to US$45.8 billion.
Bank of America believes that the core driver of this better-than-expected performance comes from the rapid scale-up of 2nm processes.The bank estimates that 2nm's share of revenue in the third quarter jumped from 3% in the second quarter to about 11%, mainly benefiting from Apple's mobile SoC inventory during the new product release cycle and strong growth in demand for AMD Venice server CPUs. Meanwhile, Mediatek and Qualcomm's incremental inventory buildup for flagship smartphone SoCs also provided supplementary support, although the inventory level was lower than seasonal due to weak demand for Android.
At the 5nm and 3nm nodes, Bank of America expects capacity utilization to remain above 100%, mainly driven by demand for high-performance computing and AI, including strong demand for several accelerator products such as Nvidia Rubin GPUs, AMD MI400, and AWS Trainium3, as well as continued growth in server CPUs and network switching chips.
Fourth Quarter Outlook: Increased mixed average price drives sales, but gross margin falls short of market expectations.
Bank of America expects TSMC's revenue to grow by about 11% quarter-over-quarter in the fourth quarter, better than the seasonal average of 7% over the past decade. The driving factors are mainly the continuous migration of product portfolio to advanced processes:The revenue share of 5nm and below processes is expected to further increase from 71% in the third quarter to 75%, the contribution of 2nm is expected to increase to 18%, and its wafer pricing is more than 15% higher than that of 3nm.
However, Bank of America's forecast for fourth-quarter gross margin is more conservative than the market. The bank expects its gross profit margin for the fourth quarter to be approximately 67.8%, lower than the market's recent expectation of 68% to 69%. The main dragging factors include: the expansion of overseas wafer fabs and 2nm production capacity in the second half of 2026, which will lead to a 25% to 30% increase in depreciation quarter-on-quarter; As 2nm's revenue contribution expands, the dilution effect of gross profit margin brought about by the yield ramp may be more significant in the fourth quarter, with an expected impact of 3 to 4 percentage points.
Bank of America's earnings forecast for 2026 to 2028 is generally 5% to 15% higher than the market consensus, primarily based on higher sales growth assumptions. Bank of America expects TSMC's earnings per share to be NT$112, NT$161, and NT$203 in 2026, 2027, and 2028, respectively.
Capital expenditures continue to expand and are expected to exceed $83 billion by 2027.
Against the backdrop of a robust demand outlook, Bank of America expects TSMC's capital expenditures to reach approximately $63 billion in 2026, at the upper end of the company's guidance range of $60 billion to $64 billion. Expenditures are focused on advanced front-end manufacturing, including 3nm capacity expansion of approximately 55,000 to 60,000 wafers/month, 2nm capacity ramp-up of approximately 60,000 wafers/month, and initial A16 capacity installation of approximately 3,000 to 5,000 wafers/month.
Looking ahead to 2027, Bank of America expects capital expenditures to further jump to approximately $83 billion, for the continued expansion of N3, N2, A16 and CoWoS-L, as well as initial mass production preparations for new technologies such as CoPoS and CPO. Bank of America estimates that TSMC's capital expenditures will grow at a compound annual growth rate of approximately 20% from 2026 to 2028.
It is worth noting that equipment suppliers plan to raise prices for front-end manufacturing equipment by 10% to 15% and back-end packaging equipment by 5% to 10% starting in 2027, which may push TSMC to increase its capital expenditures by about 10%. Bank of America believes that, given TSMC's strong bargaining power relative to the supply chain, related costs can be passed on to customers through wafer foundry pricing when equipment is delivered and put into production in the second half of 2027, and expects TSMC to raise the price of advanced process wafers by 5% to 10% in the first quarter of 2027.
Despite a significant increase in capital expenditures, Bank of America estimates that depreciation growth will be lower at a CAGR of 21% than the CAGR of 32% for revenue, thereby supporting gross margin expansion to 68% to 69% in 2028.
Technological leadership continues to expand, and the competitive landscape is stable.
Bank of America believes that TSMC's technological leadership in advanced manufacturing processes is being further consolidated. In terms of transistor density, TSMC N3/N3E is about 30% ahead of Intel 3/18A; Looking ahead, Bank of America estimates that the transistor density advantage of TSMC's A16/A12 nodes over Intel's 18A-P/14A will further expand to approximately 50% to 60%.
In the back-end packaging field, TSMC is pushing forward with the CoWoS technology upgrade. The 5.5x mask size version will be mass-produced in 2026 with a yield of over 98%, and plans to push the technology to the 9.5x to 14x mask limit between 2027 and 2028.Bank of America predicts that the CoWoS-R/L industry supply will need to expand at a compound annual growth rate of 52% to meet demand from 2026 to 2028, and TSMC will continue to dominate the complex GPU and ASIC packaging market.
Regarding the potential competitive threat posed by Elon Musk's Terafab, which has drawn market attention, Bank of America believes the risk is overestimated. The bank's analysis points out that, based on a ten-year investment plan of US$119 billion, Terafab can only establish a maximum advanced process capacity of about 96,000 wafers per month by 2036, far less than the scale of TSMC, and has recently faced issues such as delays in external customer certification for Intel 18A. Bank of America judged,SpaceXOn the contrary, it may become an important anchor customer for TSMC, consuming about 20% of TSMC's advanced process capacity by 2029.
Bank of America maintains its buy rating on TSMC with a target price based on 20 times the expected 2027 P/E. Haas Liu pointed out that TSMC's current stock price corresponds to approximately 16 times the expected P/E for 2027, which is in the middle of its historical valuation range of 11 to 21 times. Considering the company's leadership in advanced manufacturing processes, the current valuation is "not harsh".
Bank of America analysis shows that P/E, TSMC's major customers, currently has a premium of approximately 45% over TSMC, which is higher than the long-term average premium of 22%. HPC customers charge premiums as high as 100% to 150%, far exceeding the historical average of 53%. Bank of America believes that TSMC's stock price increase over the past two years has been mainly driven by upward earnings revisions, with limited expansion in valuation multiples. In the future, as its technology leadership further strengthens, the stock price has room to be revalued to at least 20 times NTM P/E.
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