Needham analyst Charles Shi is doubling down on his bullish stance on Taiwan Semiconductor Manufacturing Company (TSM), raising his price target from $210 to $225. This positive outlook follows the company’s strong third-quarter earnings report, highlighting the robust performance of its 3nm chip technology, primarily driven by demand from Apple Inc (AAPL).
Shi maintains his confidence in TSM reaching $110 billion in revenue by 2025. This forecast is supported by his observation that the company’s 5nm revenue is stabilizing after a period of significant growth. He also anticipates substantial margin improvement, driven by the absence of 2nm production next year, which would have otherwise diluted margins. This margin expansion is expected to push TSM’s gross margin back to 60% in the second half of 2025, leading to revised upward earnings per share (EPS) estimates.
The market appears to share Shi’s optimism, with consensus estimates aligning at $110 billion for 2025, a significant increase from the $96 billion forecast a year ago. While Shi acknowledges the potential for further upside should utilization rates for 7nm and above return to 2022 levels, he maintains a conservative stance, projecting a gradual recovery.
Moving into 2025, Shi anticipates volume, rather than price, will be the key driver of growth. With TSM’s 5nm capacity growth stabilizing and 3nm additions slowing down, he projects 13% growth in wafer shipments and a more modest 10% increase in average selling prices (ASP). This projection incorporates a 5%-10% price hike on 5nm and 3nm chips.
The absence of a new node ramp in 2025 presents an opportunity for margin improvement. With 2nm production not anticipated until 2026, TSM’s margins are poised to benefit as the dilution effect of 3nm production subsides. While TSM will continue investing in capital expenditures (CapEx) for 2nm, depreciation will not impact its income statement until mid-2026 when 2nm revenue begins to flow. As a result, Shi predicts only a 5% year-over-year increase in depreciation expenses in 2025, pushing TSM’s margins towards 60% in the latter half of the year.
Despite market expectations for TSM’s 2025 CapEx to rise from the mid-$30 billion range to nearly $40 billion, Shi considers these estimates overly optimistic. He projects $35 billion in CapEx for 2025, driven primarily by 2nm expansion and a lack of further capacity plans for other nodes. TSM’s management has confirmed the possibility of more 5nm to 3nm conversions, making further greenfield expansions for 3nm less likely.
Based on his projections, Shi anticipates a strong future for TSM. With 20% revenue growth, high 50s gross margins, and low 30s capital intensity, the company’s free cash flow margin could surpass the current 32% estimate for 2024. This positive scenario would also boost TSM’s return on equity (ROE) beyond 30%. The robust free cash flow could pave the way for dividend increases, particularly if TSM maintains its commitment to returning 70% of free cash flow to shareholders. This positive outlook suggests that TSM stock is poised for continued growth in the coming years.
TSM stock closed at $202.12 on Friday, down 1.81%.
