Taiwan Semiconductor is about to announce its performance, and Morgan Stanley anticipates three key variables

According to the Zhitong Finance APP, Taiwan Semiconductor (TSM.US) is set to announce its financial report on Thursday, with its stock price performance and earnings expectations driven by a dual logic of "demand differentiation + technology premium." Morgan Stanley has set a target price of NT$1,288, implying an upside potential of 17.6%, and maintains a "buy" rating.

Revenue Forecast: Q3 May Become a Performance Watershed

Morgan Stanley believes there are three scenarios for Taiwan Semiconductor's revenue growth in 2025: if Q3 revenue increases by 5% quarter-on-quarter (over 30% year-on-year), the annual revenue growth rate is expected to exceed 30%; if it increases by 0-3% quarter-on-quarter (about 20% year-on-year), the annual growth rate will fall to the 20% range; in the most pessimistic scenario, if it decreases by 1-3% quarter-on-quarter, the annual growth rate will remain around 20%.

This elasticity highlights the structural differentiation in demand within the semiconductor industry, with AI server chip demand remaining robust, while consumption in smartphones and PCs appears weak. Notably, Taiwan Semiconductor's advanced process capacity utilization is not expected to decline in the second half of 2025, with the continued expansion of NVIDIA (NVDA.US) GB200 series chips becoming a key support.

Gross Margin Resilience: Pricing Power Behind the 53% Red Line

Morgan Stanley predicts that the gross margin in Q3 will remain in the high range of 53%-58%, and even in a pessimistic scenario, it can still hold the 53% red line. This judgment is based on two major supports: first, Taiwan Semiconductor adopts a "technology premium + capacity binding" strategy for major clients, with 3nm process pricing increased by 20%-25% compared to 5nm; second, the utilization rate of CoWoS advanced packaging exceeds 95%, continuously diluting unit costs.

More importantly, the research report suggests a potential increase in wafer prices in 2026. If AI demand maintains its current strength, Taiwan Semiconductor is expected to further consolidate its profit barriers through pricing strategies.

Demand Code: AI Supports Half the Sky

The research report reveals that the upward risks to Taiwan Semiconductor's performance are concentrated in three points: 1) AI chip demand exceeds expectations, with current H100/H200 chip foundry orders already booked until 2026; 2) Intel (INTC.US) CPU outsourcing business is expected to accelerate from 2025 to 2027, contributing an incremental revenue of 5%-8%; 3) The recovery of the cryptocurrency market drives an increase in ASIC chip production volume.

Downside risks include: 1) The inventory adjustment in consumer electronics continues until the end of 2025; 2) The expansion of clients for processes below 3nm is not as expected; 3) Operating costs of factories in the US/Europe exceed budget. Morgan Stanley particularly emphasizes that Taiwan Semiconductor's technological gap in advanced processes (20 percentage points lower yield than Samsung's 2nm) constitutes a core moat.

Investment Focus: Three Variables Determine Valuation Elasticity

Morgan Stanley advises investors to pay close attention to three signals from Taiwan Semiconductor's earnings conference on July 17: 1) Whether the full-year revenue guidance is revised up to the 30% range; 2) A clear statement on the wafer pricing strategy for 2026; 3) A quantitative assessment of the sustainability of AI demand and the recovery pace of non-AI applications.

If all three variables develop positively, Taiwan Semiconductor's valuation is expected to exceed a dynamic price-to-earnings ratio of 25 times; conversely, there is a need to be wary of the downside risk of a 15 times price-to-earnings ratio. In the context of rising trade protectionism, the research report particularly highlights the impact of the 6% import tariff on Taiwan Semiconductor's US clients' costs, but emphasizes that its irreplaceable technology will weaken the impact of tariffs

Conclusion: Certainty and Uncertainty in Cyclical Fluctuations

This research report reflects Taiwan Semiconductor's unique positioning: it is both a barometer of the semiconductor cycle and a fundamental beneficiary of the AI revolution. When the traditional consumer electronics demand is weak and the demand for cutting-edge technologies surges, Taiwan Semiconductor's performance elasticity becomes the best sample to test whether "technology premium can transcend the cycle."

For investors, grasping the key guidance from the earnings call may become the core decisive factor in semiconductor investments in the second half of 2025