Morgan Stanley recently reaffirmed its overweight rating on Taiwan Semiconductor Manufacturing Company (TSMC) (TSM, Financial) following a discussion with its CFO, Wendell Huang. The bank suggests taking advantage of the recent stock price dip to increase holdings. The conversation focused on TSMC's additional $100 billion capital expenditure in the U.S., potential impacts on profit margins, sustainable AI demand, and the joint venture with Intel.
TSMC announced a $100 billion investment in the U.S., including plans to build three more semiconductor plants, two advanced packaging plants, and a research center. The company is expanding its Arizona facilities, with the first phase already achieving high-yield production. Future phases are being accelerated, and TSMC remains committed to investing in Taiwan, although U.S. capacity will grow.
TSMC anticipates a 2%-3% reduction in profit margins over the next five years due to overseas expansion, including the U.S. investment. The company is negotiating with U.S. clients to share production costs due to higher local expenses. As production scales up and the ecosystem improves, costs are expected to decline, potentially maintaining a long-term gross margin of 53% or higher.
Despite ruling out acquiring wafer fabs, TSMC is open to shareholder-beneficial options. The U.S. operations may demand significant management and human resources. AI demand remains robust, with TSMC planning to double its CoWoS capacity by 2025, reflecting flexible customer demand.
TSMC forecasts a near 20% revenue CAGR over the next five years, with cloud AI semiconductors driving growth at nearly 40% CAGR. While non-cloud AI business growth may be modest, increased semiconductor content in smartphones, GPUs, and IoT devices is anticipated.
The company plans to establish two advanced packaging plants in Arizona and is considering the location for its U.S. R&D center. TSMC received a $1.5 billion subsidy from the CHIPS Act in 2024, with future subsidies dependent on U.S. policies.
For new process nodes, initial production in Taiwan is deemed most efficient, minimizing the time required to introduce new technologies to U.S. fabs. TSMC maintains a competitive edge in technology, particularly in high-NA EUV lithography.
