Taiwan Semiconductor Manufacturing (TSM.US) reported first-quarter earnings and second-quarter guidance that surpassed expectations, leading Morgan Stanley to reaffirm its Overweight rating. The firm set a target price of NT$2,288, implying a 10% upside from the current share price, citing the company's central role in AI chip manufacturing. The strong first-quarter results and optimistic outlook for the second quarter further reinforce the long-term investment thesis.
A key highlight of the earnings report was the upward revision of both performance metrics and forward guidance. Taiwan Semiconductor Manufacturing's net profit for the first quarter surged 58% to NT$572.5 billion (approximately $18 billion), significantly exceeding the average analyst estimate of NT$542.4 billion. This consensus estimate had been revised upward repeatedly since February. The company's own guidance also substantially outperformed recently raised market expectations.
Management now expects total revenue growth for the year to exceed 30%, up from a previous forecast of below 30% and above the general market expectation of 25%-28%. Company executives noted that due to persistently strong demand for AI chips and advanced packaging, capital expenditure is expected to be near the top end of the previously guided range (up to $56 billion). They emphasized that capital spending over the next three years will be significantly higher than in the past three years, indicating strong confidence in future growth prospects.
The company's first-quarter gross margin reached 66.2%, notably higher than Morgan Stanley's projection of 64.2%. Its second-quarter revenue guidance calls for a 10% sequential increase, surpassing the market's consensus expectation of 5%-10%. The midpoint of its second-quarter gross margin guidance, at 66.5%, also exceeded institutional forecasts.
Despite weakness in the PC and smartphone end markets and macroeconomic uncertainties, robust demand for AI-related chips continues to be the primary driver of Taiwan Semiconductor Manufacturing's performance. Morgan Stanley raised its full-year 2026 revenue growth forecast for the company to over 30% year-on-year, close to its previous estimate of 35%, validating the high growth trajectory of the AI sector.
On capital expenditure, driven by strong demand for 3nm AI chips and HBM substrate chips, Taiwan Semiconductor Manufacturing guided its 2026 capital spending toward the upper end of the $52-56 billion range. While the company did not provide the market's anticipated three-year $200 billion spending plan, management clearly stated that future capital expenditures will continue to increase. They are deepening collaborations with equipment suppliers like ASML to ensure capacity expansion. Morgan Stanley views this adjustment as reflecting confidence in long-term AI chip demand, anticipating that advanced process capacity will remain tight.
Regarding the competitive landscape, Morgan Stanley emphasized that Taiwan Semiconductor Manufacturing's leadership in advanced process technology presents a high barrier to entry. New entrants, such as Powerchip Semiconductor Manufacturing, face no shortcuts, as advanced foundry technology requires years of accumulation, and building new wafer fabs involves a cycle of 2-3 years. In response to competition from Intel's EMIB packaging technology, Taiwan Semiconductor Manufacturing is pursuing a dual strategy of openness and steadfastness: it is opening its compute chiplets to third-party packaging to expand the AI semiconductor market, while simultaneously insisting on offering CoWoS packaging solutions at reasonable costs to protect its core value and solidify its lead in advanced packaging.
On valuation and profitability, Morgan Stanley raised its 2026-2027 EPS estimates for Taiwan Semiconductor Manufacturing to NT$95.60 and NT$116.57, respectively. The stock trades at a 2026 P/E ratio of 21.8x, which is considered attractive. The report concluded that the first-quarter results and second-quarter guidance align with the most optimistic scenario, and it anticipates a near-term stock price increase of 3%-5%.
Potential upside catalysts include stronger-than-expected AI demand, sustained high market share in advanced processes, and increased outsourcing of Intel CPU production. Downside risks involve an industry-wide inventory adjustment in 2026, weakening demand for advanced processes, and rising costs at overseas fabrication plants. Overall, Morgan Stanley believes that Taiwan Semiconductor Manufacturing, driven by both AI chips and advanced process technology, offers strong earnings visibility and solid competitive advantages, remaining a top core holding within the semiconductor sector.