TSMC Set To Report Earnings, and Morgan Stanley Thinks These 3 Factors Are The Most Critical

TSMC is set to release its earnings report this Thursday, and both its stock performance and earnings outlook are expected to reflect a dual dynamic of “divergent demand and technology premium.” Morgan Stanley has maintained its “Overweight” rating, setting a new target price of NT$1,288, implying an upside potential of 17.6%.

Morgan Stanley believes that the third quarter of 2025 could serve as a turning point for TSMC’s performance. Depending on revenue trends, the company’s full-year growth could fall into three scenarios: a 5% quarter-over-quarter rise in Q3 revenue may push annual growth beyond 30%; a moderate 0–3% rise would likely place growth around 20%; and in the most pessimistic case, a 1–3% quarterly decline would still support roughly 20% annual growth. This revenue elasticity underscores the structural divergence in semiconductor demand, booming for AI server chips while remaining sluggish for smartphones and PCs. Notably, the utilization rate for TSMC’s advanced process nodes has remained stable in the second half of 2025, largely supported by the continued ramp-up of Nvidia’s GB200 series chips.

In terms of profitability, Morgan Stanley expects TSMC’s gross margin to remain resilient in the third quarter, ranging between 53% and 58%, with even the bearish case holding the 53% threshold. This margin strength is attributed to two factors: TSMC’s strategy of charging a premium for leading-edge technologies and locking in capacity commitments from major clients, with 3nm node pricing up 20%–25% compared to 5nm; and exceptionally high utilization—over 95%—of its CoWoS advanced packaging facilities, which helps dilute unit costs. The report also hints at the potential for wafer price increases in 2026, suggesting that if AI-related demand remains strong, TSMC could reinforce its profitability through further pricing initiatives.

The upside potential for TSMC’s performance centers on three key demand catalysts: stronger-than-expected AI chip orders, with current foundry bookings for Nvidia’s H100/H200 chips extending into 2026; a surge in Intel’s outsourced CPU business between 2025 and 2027, contributing an estimated 5%–8% to revenue growth; and a recovery in the cryptocurrency market that could lead to higher ASIC chip production volumes. However, risks remain, including prolonged inventory correction in consumer electronics through the end of 2025, weaker-than-expected customer adoption of sub-3nm nodes, and potential cost overruns at TSMC’s U.S. and European fabs. Importantly, the report highlights TSMC’s core moat in advanced process technology, with a notable 20 percentage point yield advantage over Samsung’s 2nm process.

Looking ahead, Morgan Stanley advises investors to closely monitor three indicators during TSMC’s July 17 earnings call: whether full-year revenue guidance is raised toward the 30% range; clarity on wafer pricing strategy for 2026; and quantified views on the sustainability of AI demand and the recovery pace of non-AI applications. Should all these signals point in a positive direction, TSMC’s valuation could expand beyond a 25x forward price-to-earnings ratio. If not, there is a potential downside to 15x. Amid rising global trade protectionism, the report also flags the impact of the 6% U.S. import tariff on TSMC’s American clients, but emphasizes that the company’s irreplaceable technology advantage is likely to mitigate the pressure.

In summary, this research note reflects TSMC’s distinctive position as both a bellwether of the semiconductor cycle and a foundational beneficiary of the AI boom. With demand for legacy consumer electronics softening and frontier technologies surging, TSMC’s earnings flexibility offers a compelling test case for whether “technology premium” can truly transcend economic cycles. For investors, the signals from this upcoming earnings call may well determine the direction of semiconductor investments in the second half of 2025.