According to a trading desk report, Goldman Sachs' Bruce Lu team released its latest research note on Taiwan Semiconductor Manufacturing (TSM) on the 15th, significantly raising future growth expectations and profitability targets, suggesting the company is entering a new AI-driven multi-year growth cycle. Goldman Sachs raised its 12-month price target from NT$2,330 to NT$2,600, maintaining a Buy rating and its position on the Asia Pacific Conviction List.

During its fourth-quarter analyst call on January 15th, TSMC provided a business outlook that exceeded expectations. The company raised its five-year compound annual growth rate (CAGR) for AI accelerator-related revenue (2024-2029) from the previous mid-40% range to a mid-to-high 50% range, while also lifting its overall revenue five-year CAGR target from 20% to nearly 25%. Management stated that the AI-driven supply-demand imbalance remains unresolved, with advanced process capacity continuing to be tight; Goldman Sachs anticipates this supply gap will persist until 2027.

Regarding profitability, TSMC raised its long-term gross margin target from "53% and above" to "56% and above." The actual fourth-quarter gross margin reached 62.3%, surpassing market expectations. Although the ramp-up of overseas capacity is expected to dilute gross margins by 2-3 percentage points in 2026, improvements in production efficiency will directly contribute to profits. Goldman Sachs forecasts gross margins will reach 63.2%/64.0% in 2026/2027, significantly higher than the 59.9% projected for 2025.

Furthermore, advanced packaging is emerging as TSMC's second growth engine. Management guided for this business to account for 8% of revenue in 2025, rising to slightly above 10% in 2026, with its growth rate over the next five years expected to outpace the company's overall average. Driven by this, Goldman Sachs raised its 2026-2027 earnings per share (EPS) forecasts by 11-12%.

AI demand is driving a new growth cycle. TSMC has significantly raised its long-term growth expectations for its AI business. Management now anticipates AI accelerator-related revenue will grow at a mid-to-high 50% CAGR between 2024 and 2029, a substantial increase from the previous mid-40% guidance. This revision prompted the company to raise its overall five-year revenue CAGR target from 20% to nearly 25% (in USD terms).

Management emphasized the sustainability of this growth trend. Cloud service providers are realizing tangible financial returns from their AI investments, and their financial health remains robust. Goldman Sachs continues to view AI as a multi-year growth engine for TSMC, expecting the supply-demand imbalance to last until 2027, as exponential growth in token consumption will keep chip demand ahead of supply, with new capacity from the current capital cycle only coming online in 2028/2029.

Goldman Sachs expects capacity utilization for N3/N5 processes to remain tight, fueled by robust AI demand and ongoing production efficiency gains. The firm now forecasts TSMC's revenue (in USD) to grow by 34.5%/27.4% in 2026/2027, up from previous estimates of 30.4%/28.0%.

Capital expenditure is entering a new upward cycle. TSMC's disclosed 2026 capital expenditure guidance exceeded market expectations, becoming another key highlight. The company guided for 2026 capital expenditure of $52-56 billion, significantly higher than the $40 billion for 2025 and surpassing Goldman Sachs' previous estimate of $46 billion and the market consensus of approximately $50 billion.

Goldman Sachs attributes this higher-than-expected guidance to the front-loading of some equipment investments from 2027 into 2026, along with increased infrastructure spending. Management also indicated that capital expenditure over the next three years will be significantly higher than the $101 billion spent over the past three years, reflecting the higher capital intensity of the N2 process and sustained strong customer demand.

Based on the raised long-term AI growth trajectory, Goldman Sachs increased its 2026/2027 capital expenditure forecasts to $56 billion/$65 billion (from $46 billion/$54 billion previously), representing year-on-year growth of 37%/16%, respectively.

A gross margin exceeding 60% is becoming the new normal. TSMC's profitability reached a historical high. The fourth-quarter gross margin was 62.3%, up 280 basis points quarter-on-quarter and 330 basis points year-on-year, exceeding both Goldman Sachs' and the Bloomberg consensus estimates of 60.7%/60.6%. The first-quarter gross margin guidance was further raised to 63-65%, far above Goldman Sachs' and market expectations of 59.6%.

This strong performance was driven by better-than-expected manufacturing improvements and production efficiency gains. Management raised its long-term gross margin target from "53% and above" to "56% and above." Goldman Sachs expects gross margins above 60% to become the new standard, even in a high-cost environment.

Although the N2 process is planned to ramp up rapidly in the second half of 2026, with management expecting a full-year gross margin dilution of 2-3 percentage points, the dilution from overseas fabs is lower than anticipated, and continuous improvements in manufacturing efficiency will directly contribute to profits. Goldman Sachs now forecasts 2026/2027 gross margins to reach 63.2%/64.0%, significantly raised from previous estimates of 60.4%/60.6%, with second-half margins expected to be slightly lower due to N2 dilution.

Advanced packaging is becoming a second growth engine. Advanced packaging is evolving into another key growth driver for TSMC. Management guided for the advanced packaging business to account for 8% of revenue in 2025, rising to slightly above 10% in 2026, while also expecting its growth rate over the next five years to exceed the company's overall average.

Goldman Sachs made minor adjustments to its CoWoS shipment forecasts, now expecting 1.197 million/2.171 million wafers in 2026/2027 (previously 1.185 million/2.195 million), representing year-on-year growth of 90%/81%, respectively, while keeping capacity forecasts unchanged at 1.275 million/2.31 million wafers. The firm anticipates CoWoS revenue to grow by 102.5%/81.2% year-on-year in 2026/2027, with its revenue contribution rising to 11.7%/16.7%.

TSMC maintains its allocation of 10-20% of 2026 capital expenditure for advanced packaging, testing, and mask making, while total capital expenditure is expected to grow 37% year-on-year in 2026. Goldman Sachs believes semiconductor equipment suppliers will be key beneficiaries of the accelerated expansion in CoWoS and broader advanced packaging technologies.

Strong performance drives valuation upgrades. TSMC's fourth-quarter results comprehensively beat expectations. Revenue was NT$1,046.09 billion ($33.73 billion), up 5.7% quarter-on-quarter and 20.5% year-on-year, exceeding company guidance and market expectations. Earnings per share were NT$19.50, increasing 11.8% quarter-on-quarter and 35.0% year-on-year, surpassing estimates from Goldman Sachs and the market. The gross margin of 62.3% and operating margin of 54.0% were both better than expected.

For the first quarter, management guided for revenue of $34.6-35.8 billion (based on an exchange rate of NT$31.6 to USD$1), implying 4% quarter-on-quarter growth, a gross margin of 63-65%, and an operating margin of 54-56%. The revenue guidance is stronger than Goldman Sachs' expectation of 1.8% quarterly growth, and the gross margin guidance is significantly higher than the anticipated 59.6%, primarily benefiting from higher capacity utilization and continued cost efficiency improvements.

Based on the raised performance forecasts, Goldman Sachs increased its 2025/2026/2027 EPS estimates by 2.4%/10.8%/11.6%, respectively. The 12-month price target was raised from NT$2,330 to NT$2,600, based on 22 times the 2027 estimated price-to-earnings ratio (unchanged). For the ADR, the target price was raised from $466 to $520. Goldman Sachs maintains its Buy rating, implying a 54% upside potential from the current share price.

Goldman Sachs emphasized that TSMC's solid technology leadership and execution capabilities position it better than peers to capture long-term structural growth opportunities in the industry, particularly in AI. The firm views the company's prospects of achieving its 25% revenue CAGR target over the coming years as clear, primarily driven by growing chip content and AI/HPC demand, with long-term gross margins expected to remain above 56%.

At the time of writing, TSMC's share price was up 2.96% to NT$1,740.