Morgan Stanley: Strong demand will support the second quarter report, reiterates "Overweight" rating on Taiwan Semiconductor

According to Zhitong Finance APP, Taiwan Semiconductor (TSM.US) will announce its financial performance for the second quarter of 2025 on July 17. JP Morgan released a research report, expecting Taiwan Semiconductor to achieve strong performance in the second quarter. Morgan Stanley maintains an "overweight" rating on Taiwan Semiconductor, with a target price of NT$ 1,275 (20 times the expected earnings per share for the fiscal year 2026). After a strong rise of over 35% from the low point in early April, Morgan Stanley believes the stock may be in a range-bound state in the short term, as concerns about gross margins may resurface due to the significant appreciation of the New Taiwan Dollar. JP Morgan released a research report, expecting Taiwan Semiconductor to achieve strong performance in the second quarter, with Q2 revenue expected to grow 17% quarter-on-quarter (in USD), far exceeding its guidance (11%-14% quarter-on-quarter growth), thanks to strong growth from the N3 production line, continued strong performance from the N5 series, and urgent orders from some older process nodes. Furthermore, even if the New Taiwan Dollar continues to appreciate in the second quarter, Morgan Stanley still expects the gross margin to reach 57.9%, fully within the guidance range, benefiting from higher utilization rates and wafer prices from urgent orders. Looking ahead to the second half of 2025, the fundamental demand drivers seem more optimistic than three months ago, which should prompt Taiwan Semiconductor to raise its revenue growth guidance for the fiscal year 2025 to the high end of the 20% range (in USD, Morgan Stanley expects 29%), driven by the growth in AI demand and limited reduction in Apple orders. However, Morgan Stanley still expects growth in the second half of 2025 to slow down, as the second quarter was affected by tariff-related factors, which will provide some upside potential for the second half of 2025, provided that AI demand remains strong. At the same time, the continued appreciation of the New Taiwan Dollar (up 11% since late April) may impact gross margins and earnings in the second half of 2025. Morgan Stanley now expects revenue in New Taiwan Dollar terms to grow by 21% in 2025, with gross margins in the second half of 2025 around 56%, due to currency appreciation. In 2026, Morgan Stanley expects USD revenue to grow by 17% to 19% due to strong AI demand, better-than-expected N2 order demand, and continued price increases. Morgan Stanley also expects gross margins to remain relatively stable in 2026 (expected at 56.9%), benefiting from improved yield rates in 3-nanometer processes and price increases, but will be affected by stronger foreign exchange fluctuations and dilution effects related to N2. Morgan Stanley maintains an "overweight" rating on Taiwan Semiconductor, with a target price of NT$ 1,275 (20 times the expected earnings per share for the fiscal year 2026). After a strong rise of over 35% from the low point in early April, Morgan Stanley believes the stock may be in a range-bound state in the short term, as concerns about gross margins may resurface due to the significant appreciation of the New Taiwan Dollar. Overall, Morgan Stanley expects the structural growth momentum of Taiwan Semiconductor to remain strong, due to its near-monopoly position in AI accelerators and cutting-edge AI fields, as well as its strong process roadmap (N3 and N2) and industry-leading packaging technology. Morgan Stanley expects Taiwan Semiconductor to raise its USD revenue guidance for the fiscal year 2025, driven by strong AI demand and a slight reduction in Apple orders In addition, Morgan Stanley expects the production of N2 to significantly increase starting in 2026, with multiple clients beginning to migrate their artificial intelligence accelerators to N3 from the end of 2025, thereby ensuring the full utilization of N3