Taiwan Semiconductor continues to exceed expectations in Q2? JP Morgan: Advanced process orders are full, and the appreciation of the New Taiwan Dollar may pose profit challenges

TSMC's second-quarter performance is expected to exceed expectations, demonstrating strong fundamentals, but JP Morgan's latest analysis points out that the significant appreciation of the New Taiwan Dollar will pose challenges to TSMC's profit outlook for the second half of the year.

According to a report released by JP Morgan on the 6th, TSMC's second-quarter revenue is expected to reach $29.95 billion, a quarter-on-quarter increase of 17%, far exceeding the company's guidance. This is mainly due to the continued strong demand for 3-nanometer (N3) and 5-nanometer (N5) processes, as well as urgent orders for older process nodes. Even in the face of the significant appreciation of the New Taiwan Dollar, the Q2 gross margin is still expected to maintain at 57.9%.

However, looking ahead to the second half of 2025, growth momentum is expected to slow down. JP Morgan predicts a quarter-on-quarter revenue growth of 3-6% in the third quarter, while the fourth quarter may see a quarter-on-quarter decline of 6%. The New Taiwan Dollar has appreciated by 11% since the end of April, and this exchange rate headwind has prompted JP Morgan to lower its earnings forecast for TSMC for the fiscal years 2025 and 2026, expecting the gross margin in the second half of the year to drop to around 56%.

Despite facing exchange rate pressures, JP Morgan believes that TSMC's leadership position in advanced processes and strong demand remain its core advantages.

Second Quarter Performance: Strong Fundamentals Against Exchange Rate Pressure

JP Morgan expects TSMC's second-quarter revenue to reach $29.95 billion, a quarter-on-quarter increase of 17%, significantly surpassing the company's previous guidance range of 11-14%. This strong performance is mainly driven by three factors: rapid ramp-up of the N3 process, continued strong performance of the N5 series, and urgent orders for older process nodes.

Despite the significant appreciation of the New Taiwan Dollar this quarter, thanks to higher capacity utilization and wafer price increases driven by urgent orders, the report expects the Q2 gross margin to still reach 57.9%, falling within the company's guidance range.

Outlook for the Second Half: Improved Fundamentals but Increased Exchange Rate Drag

Looking ahead to the second half of the year, JP Morgan believes that the fundamental driving factors are more positive than three months ago, which will drive TSMC to raise its full-year revenue guidance for 2025 to a high growth level of 29% (in USD). The rising demand for AI and the limited reduction in Apple orders are the main supporting factors.

However, the New Taiwan Dollar has appreciated by 11% since the end of April, which will have a significant impact on gross margin and profits in the second half of the year. To reflect this impact, JP Morgan has adjusted its exchange rate model assumption to 1 USD to 29 New Taiwan Dollars. Based on this, the report has lowered TSMC's earnings forecast for the fiscal years 2025 and 2026 by 1% and 2%, respectively. After the adjustment, the expected revenue growth rate in New Taiwan Dollars for 2025 is 21%. The gross margin in the second half of the year is expected to drop to around 56% due to the impact of exchange rate appreciation.

Quarterly, the third quarter is expected to see a quarter-on-quarter revenue growth of 3-6% (in USD), while the fourth quarter may see a quarter-on-quarter decline of 6% due to the fading effect of demand pull-forward and conservative expectations for non-AI demand.

Strong Demand for Advanced Processes, AI as the Core Driver

Despite the exchange rate interference, JP Morgan believes that TSMC's leading position in advanced processes and strong demand remain its most solid moat

• N3 Process: With AI accelerators transitioning to N3P and N3X processes starting at the end of 2025, it is expected that the capacity of N3 will maintain an ultra-high utilization rate of over 100% in 2026 and 2027, and there may even be a supply-demand imbalance due to capacity constraints.
• N2 Process: The demand outlook for N2 in 2026 is "quite strong." Major customers, including Apple, AMD, Broadcom, Qualcomm, MediaTek, and Intel, are likely to adopt N2 technology in 2026. The report specifically mentions that Apple may consider fully adopting N2 processors in four new iPhone models in the second half of 2025, which will further boost N2 demand. JP Morgan predicts that N2's revenue in its first year in 2026 could reach $6.8 billion, with its ramp-up speed surpassing that of N5 and N3.

Non-AI Demand Shows Clear Differentiation: Strong Computing Resilience, Mixed Mobile Demand

Demand in the non-AI sector continues to show a differentiated pattern. Computing demand (PCs, gaming, and servers) is performing quite resiliently, primarily benefiting from a strong gaming cycle and AMD's continued market share gains in the PC and server markets.

NVIDIA's front-end wafer demand has risen, possibly related to the preparation of GPU products in China and strong demand for gaming graphics cards. AMD's demand remains stable, while Intel is relatively weak due to reduced outsourcing for Arrow Lake/Lunar Lake and concerns about market share.

In the mobile sector, demand is mixed; MediaTek may experience weakness, but this is offset by stable demand from Qualcomm and Apple's lack of incremental cuts despite tariff concerns. The utilization rates for N7 and N12 processes remain sluggish, and demand for consumer and other products has yet to show synchronized recovery