Investment Rating - The report maintains a "Buy" rating for TSMC, with an "Overweight" (OW) stance, suggesting accumulation ahead of the earnings print due to low expectations [1][6]. Core Insights - TSMC's preliminary revenue for 2Q25 was NT$933 billion, reflecting an 11% quarter-over-quarter (Q/Q) increase in TWD, translating to approximately US$29.6 billion, which is a 16% Q/Q increase in USD, exceeding both the company's guidance and Morgan Stanley's estimates [2][3]. - The likelihood of TSMC raising its full-year revenue guidance has increased, with expectations of a 27% year-over-year (Y/Y) growth in USD, driven by strong AI demand and tight leading-edge capacity [3][13]. - The report highlights that TSMC's fab utilization in the second half of 2025 remains robust despite lukewarm demand in smartphones and PCs, indicating a potential shift in demand dynamics [3][13]. Revenue and Earnings Guidance - TSMC is expected to raise its 2025 full-year revenue guidance from mid-20% to high-20% due to strong AI demand, with 3Q25 revenue projected to increase by 1% Q/Q in USD [17][18]. - The report forecasts a gross margin decline to 55.6% in 3Q25, with TWD revenue potentially decreasing by nearly 4% Q/Q due to TWD appreciation [15][17]. - The preliminary EPS estimate for 2Q25 is NT$14.40, with a gross margin around 57% [17]. Price Target and Valuation - The price target for TSMC remains NT$1,288, implying a 17% upside from the current share price of NT$1,100 [6][56]. - TSMC is trading at 17x the estimated EPS for 2026, which is considered attractive, with expectations of a re-rating to 20x due to increased bargaining power and sustainable AI demand [18][56]. Market Dynamics and Demand Drivers - The report notes that TSMC's wafer pricing strategy may be influenced by FX impacts, with expectations of a 3-5% price hike in 2026 due to strong demand and TWD appreciation [26][30]. - AI demand is projected to significantly contribute to TSMC's revenue, with expectations that cloud AI revenue will grow from 13% in 2024 to 34% by 2027 [37][40]. Semiconductor Tariffs and Regulatory Environment - The report discusses the potential for TSMC to receive an exemption from semiconductor tariffs due to its significant investment in US production, which could mitigate revenue risks associated with such tariffs [4][25].

Core Viewpoint - Taiwan Semiconductor Manufacturing Company (TSMC) is a crucial player in the AI chip manufacturing space, serving as a reliable partner for AI chipmakers despite not designing chips itself [1][7]. Group 1: TSMC's Market Position - TSMC is recognized as the world's most advanced semiconductor foundry, with major clients including Nvidia, AMD, Broadcom, and Apple, giving it unmatched scale and technological leadership [2]. - The company has a significant market share lead in the advanced node market, outperforming competitors like Intel and Samsung [2]. Group 2: Revenue and Growth - In Q1, TSMC's revenue increased by 35% to $25.5 billion, driven by high-performance computing (HPC) growth, and preliminary Q2 revenue is estimated to have risen by 39% to $31.9 billion [4]. - Chips manufactured on 7nm and smaller nodes accounted for 73% of TSMC's revenue in Q1, up from 65% the previous year, with 3nm nodes contributing 22% [3]. Group 3: Pricing Power and Margins - TSMC's strong pricing power is evident as it raises prices to counteract margin dilution from new fabs, with gross margin rising by 190 basis points to 58.8% in Q1 [4][5]. - The company plans to increase AI chip prices, with Arizona-made chips potentially commanding a 30% premium [5]. Group 4: Future Growth Prospects - TSMC anticipates AI-related revenue to grow at a mid-40% compounded average growth rate (CAGR) over the next five years starting in 2024 [8]. - The company is also positioned to benefit from the growth of autonomous driving and robotaxis, which will require advanced chips [9]. Group 5: Investment Appeal - TSMC is viewed as a safe investment in the AI semiconductor space, as it provides manufacturing services to all major players without needing to bet on a single chipmaker [11]. - The stock is attractively valued, trading at a forward P/E ratio of 24 based on 2025 estimates and a PEG ratio of less than 0.7, indicating it is undervalued [12].