Core Viewpoint - Morgan Stanley maintains an "Overweight" rating on TSMC, raising its target price for TSMC's stock from NT$1,275 to NT$1,550, while also increasing earnings per share expectations for 2025-2026 and revenue growth forecasts for 2026 due to strong AI demand in data centers, advanced process capacity release, and sustained high gross margins [1] Group 1: Revenue Growth Drivers - TSMC's revenue in USD is expected to grow by 24% in 2026, driven by four main factors: strong demand for N3 process, N2 process demand from iPhone models and new flagship SoCs from Qualcomm and MediaTek, an increase in average selling prices (ASP) for advanced processes by 6%-10%, and a 60% growth in CoWoS wafer shipments in advanced packaging [1] - The data center AI business is highlighted as TSMC's core long-term growth engine, with a revised compound annual growth rate (CAGR) of 53% for data center AI revenue from 2024-2029, and an expectation to further raise the five-year CAGR guidance from the current midpoint of 40% [2] Group 2: Demand Structure and Market Trends - AI accelerators (GPUs and ASICs) are projected to account for 68% of TSMC's data center AI total demand by 2029, with sustained high demand from large cloud service providers, emerging cloud companies, AI labs, and sovereign AI projects driving GPU demand [2] - The demand for networking equipment and HBM (High Bandwidth Memory) chips is also expected to contribute significantly, with a CAGR of 58% for TSMC's AI networking equipment revenue from 2024-2029, and a forecasted revenue of $12 billion from HBM chips by 2029, representing 12% of total data center AI revenue [3] Group 3: Capital Expenditure and Capacity Expansion - To meet strong demand, TSMC's capital expenditure for 2026 is projected to increase from $45 billion to $48 billion, focusing on N2 and N3 advanced process capacity and advanced packaging [5] - TSMC plans to add approximately 50,000 wafers per month of N2 process capacity by the end of 2026, with N3 capacity potentially being accelerated in Arizona to meet unexpected AI accelerator demand [5] Group 4: Financial Performance Expectations - TSMC's revenue for Q4 2025 is expected to remain flat quarter-over-quarter, with a projected 35% growth in USD revenue for the fiscal year 2025, benefiting from better-than-expected demand from Apple and AI data centers [5] - The gross margin for TSMC is anticipated to remain at a high level of 50% in Q4 2025 and throughout 2026, supported by stable exchange rates, capacity dilution from U.S. factories, price increases in advanced processes, and strong demand for leading processes, despite a 25% increase in depreciation costs [5]