Morgan Stanley: Major customers recognize and are optimistic about TSMC's price increase logic

Wall Street Sights

2024-06-07 14:57Posted on the official account of Shanghai Wall Street

The author of this article is Li Xiaoyin

Source: Hard AI

On Tuesday, TSMC held a shareholder meeting, and TSMC's new chairman, Wei Zhejia, hinted after the meeting that it was considering raising the price of the company's artificial intelligence chip foundry services, and said that he had discussed the issue with Nvidia founder and CEO Jensen Huang.

In response to relevant questions, Huang publicly acknowledged TSMC's value in chip foundry:

"TSMC's wafer prices are really too low, and TSMC's contribution to the world and the technology industry is underestimated by its financial performance."

Based on this, the analysis team led by Morgan Stanley analyst Charlie Chan released a research report on June 5, expecting TSMC to raise wafer prices by 5% in 2025 to maintain its gross profit margin at 53% and above, and said that if Nvidia accepts the price increase, other key AI customers may also follow.

Currently, TSMC is the sole production partner for NVIDIA's most advanced AI training chips, including the latest Blackwell series.

A 5% price increase is possible in 2025, and the average selling price of 3nm wafers will increase by 11%

Da Mo believes that in order to achieve the gross margin target of 53% and above, TSMC may have to raise prices to pass on the high cost of US fabs.

According to the report, based on TSMC's history of raising prices by 10% in 2022 and 5% in 2023, it believes that another 5% price increase in 2025 is "possible".

The report pointed out that Nvidia is TSMC's main customer, and the former's orders can account for 10% of the latter's revenue this year, and if Nvidia accepts TSMC's plan to raise prices, it means that Nvidia's management recognizes TSMC's reliability, and it is expected that other downstream chipmaker customers may also follow suit in September or October this year.

Therefore, Da Mo predicts that in the next two years, the average selling price of 3nm wafers will increase by 11%, the average selling price of 4nm wafers will increase by 3%, and the price of CoWoS packaging will increase by 20%.

On this basis, Da Mo expects TSMC's gross margin to recover to 53-54% in 2025.

By 2025, AI will contribute more than 20% of revenue

At the same time, the demand for AI chips remains strong. The report predicts that TSMC will more than double its CoWoS production capacity in 2024, and some packaging processes may even be outsourced to other back-end foundries, and customer demand may be difficult to meet.

The report pointed out that under this trend, Da Mo believes that TSMC will become a "long-term winner" of the AI trend - whether it is GPU or ASIC, cloud computing or edge AI, most of them need TSMC's cutting-edge foundry services, so the company has a great advantage in AI growth.

Da Mo predicts that in 2024, the chip demand (excluding CPU) of the AI cloud business will contribute 11% to TSMC's revenue, and this value will increase to 20% by 2027, and if the broader AI chip foundry business is included, the contribution of the AI business to TSMC's revenue will exceed 20% by 2025.

The report also said that it raised TSMC's 2026 earnings per share forecast by 6% to account for possible price increases, and raised its Taiwan stock (2330. TW) has a target price of NT$980/share, which is still 9.8% upside from yesterday's closing price (NT$894).

Since the beginning of this year, TSMC radio stock prices have risen by 48.23%.

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