How to interpret TSMC's financial report? Goldman Sachs: The company is more bullish than investors! JP Morgan: The PE is only 25 times, and there are more positives to come

Thanks to the rapid growth of AI spending and its key role as a major chip supplier for Apple and Nvidia, TSMC's financial report for the fourth quarter of 2024, released yesterday, showed impressive performance, with US stocks rising 5.5% to reach a historic high. Goldman Sachs and JP Morgan both expressed optimism about the company's prospects.

The financial report shows that TSMC's net profit for the fourth quarter was NT$374.7 billion, a year-on-year increase of 57%, exceeding the estimated NT$369.84 billion; sales reached NT$868.46 billion, a year-on-year increase of 39%, operating profit was NT$425.71 billion, a year-on-year increase of 64%, and gross margin rose to 59%, all achieving strong growth and exceeding expectations.

Goldman Sachs reiterated its "buy" rating in a report on January 16, noting that AI capabilities further solidified TSMC's long-term growth prospects, but considering potential geopolitical risks, AI demand, and other uncertainties, it adopted a slightly conservative estimate for its 2025 earnings and CoWoS shipment volume.

On the same day, JP Morgan also released a report stating that it remains optimistic about the stock, believing there are still favorable factors ahead:

"At least until 2026, TSMC's growth prospects will remain very strong. Meanwhile, TSMC's market share in data center AI accelerators may continue to approach 100%."

Goldman Sachs: The company is more bullish than investors and has lowered its CoWoS shipment volume forecast for the next two years.

Goldman Sachs pointed out in its report that TSMC's statements at the earnings call were more optimistic than those of investors. During the meeting, it raised its long-term revenue targets and maintained a bullish stance on AI demand:

• Increased the long-term revenue compound annual growth rate (CAGR) target from 15-20% to nearly 20% (in USD), extending the cycle to 2024-2029, with AI being the main contributor to new revenue growth.

• Expected AI revenue to double by 2025, with a long-term compound annual growth rate of around 40% for AI-related revenue over the next five years starting from 2024.

• CoWoS capacity remains very tight, with demand for CoWoS in non-AI fields expected to adopt soon. As for the revenue contribution from advanced packaging, it is expected that this revenue will grow to account for more than 10% of total revenue by 2025, up from 8% in 2024.

However, TSMC did not raise its long-term profit targets, and the long-term gross margin guidance remains at "53% and above," lower than Goldman Sachs' expected "mid-50% and above."

Goldman Sachs also mentioned that although TSMC remains optimistic about CoWoS demand, considering potential geopolitical risks, AI demand, and other uncertainties, it adopted a slightly conservative estimate for its 2025 earnings and CoWoS shipment volume:

• Lowered the forecast for the year-on-year revenue growth rate (in USD) for 2025 from 26.8% to 25.0%;

• Lowered the CoWoS shipment volume forecasts for 2025 and 2026 from 635,000 and 999,000 wafers to 599,000 and 975,000 wafers. **

• Downgraded the 2025 earnings per share (EPS) by 1.2%, while upgrading the 2026 EPS by 3.3%.

Goldman Sachs reiterated its "Buy" rating on Taiwan Semiconductor and raised its 12-month target price from NT$1,355 to NT$1,400. This still represents a 26.7% upside compared to yesterday's closing price of NT$1,105. Goldman Sachs believes that the acceleration of Taiwan Semiconductor's growth, combined with management's confidence in the long-term growth trajectory of the business, supports their optimistic outlook.

JP Morgan: PE only 25 times, more positives to come

JP Morgan pointed out in its report that Taiwan Semiconductor's PE is only 25 times, and it is expected to experience strong long-term growth, with multiple positive factors likely to emerge simultaneously in the next 12-18 months.

JP Morgan maintains an "Overweight" rating on Taiwan Semiconductor and sets a target price of NT$1,500. JP Morgan believes that there will be three driving factors for Taiwan Semiconductor's stock price in the coming years:

• Revenue will grow strongly driven by generative artificial intelligence. According to guidance of approximately 20% compound annual growth rate from 2024 to 2029, Taiwan Semiconductor's revenue is expected to reach approximately $220 billion by 2029.

• Thanks to better pricing, yield, and the expansion of overseas foundries, the company's gross margin has greater upside potential, although Taiwan Semiconductor remains cautious and maintains its long-term gross margin target at (53% and above).

• Due to a lower risk premium, the price-to-earnings ratio will be higher. Taiwan Semiconductor has proven to be indispensable in the global foundry supply chain and overseas semiconductor manufacturing efforts. During this period, revenue growth should remain very strong over the next two years.

JP Morgan also mentioned that Taiwan Semiconductor's leading position in the AI accelerator field, along with its strong technology roadmap (N3 and N2) and industry-leading packaging technology, will support its long-term growth.

Additionally, JP Morgan emphasized that Taiwan Semiconductor will face many "positive catalysts" in the future. First, analysts expect Taiwan Semiconductor to launch its Arizona factory (AZ Fab) in the next 2-3 months and announce a more aggressive capacity expansion plan in the United States.

Secondly, JP Morgan believes that if improvements in N7 utilization can be seen in the future, and N3/N5 continue to maintain strong momentum, along with a rebound in mature process capacity after supply chain inventory levels decrease, Taiwan Semiconductor's gross margin is expected to reach 60% in the next 2-3 quarters, especially as some signs of improvement have already been observed.

Finally, analysts also expect Intel to further outsource more wafers to Taiwan Semiconductor, particularly in the N2/A16 process, which will further drive Taiwan Semiconductor's business growth.

Taiwan Semiconductor's stock price performed strongly after the earnings report was released. JP Morgan believes that Taiwan Semiconductor's stock price still has significant upside potential, with a target price of NT$1,500, which is 35.7% higher than Thursday's closing price.