TSMC Navigates AI Boom and Geopolitical Ripples with Strategic Expansion and Record Growth

As of last week, TSMC (TSM) recorded a slight drop of 0.63%, although it experienced a remarkable rise of 9.94% over the past week and has surged 98.5% year-to-date, bringing its latest market valuation to $1053.09 billion. The upcoming challenges and opportunities for TSMC, as the global leader in semiconductor manufacturing, are in focus as the U.S. election settles and the AI wave continues to develop.

Recent analyses project that the demand for AI hardware will remain robust, offering TSMC potential for increased gross margins. By 2026, TSMC's AI revenue is expected to grow by 40%-50%, with an overall gross margin possibly reaching 60%-65%. The company's capital expenditure guidance for the next year is projected to exceed $36 billion, with a production capacity of 20,000 wafers per month anticipated at the N2 node by the end of next year.

Concerns about the potential impacts from geopolitical developments, such as a possible future administration in the U.S., suggest limited direct effects on TSMC. This is attributed to the company's ability to pass potential tariff increases onto its clients and its relatively small volume of direct exports to the U.S. If legislative changes in the U.S. favor domestic suppliers more, TSMC might see a slowed investment pace stateside but is still poised to be the largest advanced wafer producer in the U.S. by 2028.

Even as worries persist regarding TSMC's gross margins potentially peaking, there's optimism regarding further margin expansion. The revenue from non-leading edge technologies remains 25-30% below its peak in 2022. Improvements in the yield of the N3 process and price hikes anticipated by 2025 are expected to bring positive effects.

TSMC's Arizona facility is well on its way to ramping up capacity. The initial stage is complete, with the N4 plant projected to reach a monthly capacity of 30,000 wafers by late 2025 or early 2026. A second phase focusing on N2 and A16 processes is set to commence in 2028. Companies like AMD, Apple, Broadcom, and possibly NVIDIA are among those eyeing TSMC's capacity in Arizona.

Forecasts for TSMC's key clients until 2025 spotlight Apple as the top consumer, with NVIDIA and Qualcomm also holding significant demand for advanced processes. Companies such as AMD and Intel are potential major partners, reflecting TSMC's strategic position in the semiconductor landscape.

TSMC's N2 node production capacity is set to expand significantly, with ambitions ranging from 20,000 wafers per month by 2025 to over 160,000 by 2027-2028 as the company captures an increasing share of AI chip market needs. Pricing for its N2 process is suggested to be around 25% higher than N3, indicating strategic pricing adjustments to accommodate advanced technological features.

The continued conversion from N5 to N3 processes is expected to dilute gross margins slightly, with further conversions envisioned by 2025 alongside increased N3 capacity. The decision to offer selective discounts on mature nodes is anticipated to have a negligible impact on gross margins in 2025.

Despite rising expectations of surpassing $40 billion in capital expenditures for the upcoming year, TSMC might adopt a conservative initial guidance of $36 billion, with possible increments as the year progresses. Any agreements on N2 capacity with Intel could catalyze fresh rounds of capital spending.

Looking forward, TSMC's strategic manufacturing developments, alongside its robust client relationships, continue to solidify its leading position in the semiconductor industry, navigating through both opportunities and challenges on the horizon.