The new year is approaching, as the dust of the US election has settled and the AI wave continues to develop, as a global chip foundry giant, what new opportunities and challenges will TSMC face in the new year? How will the next Trump administration affect TSMC? Is there room for improvement in gross profit margin? Has the AI hardware investment cycle peaked? What are the capacity and price plans for the N2 node process? What is the capital expenditure in 2025?On December 6, JPMorgan Chase Gokul Hariharan, Robert Hsu and others released a research report discussing issues that TSMC investors may be concerned about.
The report stated that the strong demand for AI hardware will continue, and TSMC's gross profit margin still has room for growth. It is expected that by 2026, TSMC's AI revenue will increase by 40%-50%, and the overall gross profit margin may rise to 60%-65%; the company's capital expenditure guidance range next year is expected to be more than US$36 billion, and the total monthly production capacity of the N2 node process will reach 20,000 wafers by the end of next year.
How will the next Trump administration affect TSMC?
The report believes that after Trump returns to the White House, his direct impact on TSMC may be limited. On the one hand, TSMC can pass on potential tariff increases to customers, and on the other hand, TSMC does not export many wafers directly to the United States.
The report stated that if the "Chip Act" is completely canceled, TSMC may slow down its investment in the United States, but the overall impact will be small. If the "Chip Act" is revised and favors domestic chip suppliers in the United States, it may have a small negative impact on TSMC. However, TSMC is still expected to become the largest advanced wafer producer in the United States by 2028.
Is there room for improvement in gross profit margin?
Although investors are worried that TSMC's gross profit margin has reached a cycle peak, the report believes that TSMC's gross profit margin still has room to increase.
The report stated that the current revenue of non-leading processes (excluding N5, N3 and CoWoS) is still 25-30% lower than the peak in 2022, while N3's yield improvement and price increase in 2025 may have a positive impact. It is expected that TSMC's gross profit margin may reach 60%-65% during this cycle (possibly in 2026).
What impact will Intel CEO change have on TSMC?
Wall Street News previously mentioned that Intel CEO Pat Gelsinger suddenly announced his retirement, which may bring the possibility for Intel to spin off its foundry business and embrace TSMC.
The report believes that Intel’s CEO change has no significant impact on TSMC. Intel has cooperated with TSMC in the client CPU field, and although it has not signed a major supply agreement yet, it may rely on TSMC's N2/A16 related production capacity.
The report stated that any sign of Intel’s further involvement in production capacity would be a positive driver for TSMC stock.
Has the AI hardware investment cycle peaked?
The report believes that the expansion of large AI models and the growth of inference applications will drive strong demand for AI hardware until 2026. Specifically, while large models continue to expand, the rise of some multi-modal cutting-edge models may cause leading AI companies to continue investing in larger training clusters, and will also drive more demand for inference models. It is expected that the output of AIASIC will achieve exponential growth between 2026 and 2027.
TSMC’s AI revenue is expected to grow by 40-50% in 2026, and most AI chips will shift to N3 processes.
What about the Arizona (AZ) plant's capacity ramp, customer traction, and future expansion plans?
The report believes that the first phase of TSMC's AZ factory is now ready. It is expected that by the end of 2025 or early 2026, the total monthly production capacity of the N4 factory will increase to 30,000 wafers; the second phase will begin in 2028, and the focus of the process will shift to N2 and A16.
It is expected that AMD, Apple and Broadcom will use the N4 process in the AZ factory by 2025, and Nvidia will also transfer part of Blackwell's production to the AZ factory by the end of 2025 or early 2026.
According to the report, TSMC’s strategy is to transfer more mature products (with proven yield) to the AZ factory to ensure smooth growth and good profitability. For HPC (high performance computing) products, the report believes that local packaging capacity will not be ready soon and may still be executed in factories in Taiwan.
Who are the top five customers in 2025?
The report predicts that Apple will remain TSMC’s largest customer, with demand concentrated on N3 and some N4/N6 processes. Nvidia may be the second largest customer, with demand concentrated on high-priced N4P and CoWoS-L wafers. Qualcomm is expected to be the third largest customer, with demand mainly in N3E and N4, while AMD will remain in the top five.
The last position may be occupied by Intel or MediaTek: If PC demand remains good and Intel can stabilize its market share, Intel may become TSMC's top five customers; if demand for flagship smartphone SoCs on N3 is strong, MediaTek also has the opportunity to become TSMC's top five customers.
What are the production capacity and price plans for the N2 node process?
The report stated that there is no change in the current N2 production capacity schedule. It is expected that TSMC's N2 total monthly production capacity will reach 20,000 wafers by the end of 2025, and 75,000-80,000 wafers by the end of 2026. By 2027-2028, the combined monthly production capacity of N2 and A16 processes will reach 160,000-170,000 wafers.
In terms of customers, it is expected that the first customers of the NA process will be AMD and Apple, and HPC customers may be Nvidia and Broadcom.
In terms of price, the report predicts that the price of the N2 process is expected to be 25% higher than that of N3, with the starting price per wafer ranging from US$24,000 to US$25,000. The price per wafer of A16 may be US$27,000 to US$29,000.
Will next year see TSMC further convert N5 to N3?
The report predicts that TSMC will shift its production capacity of 30,000-35,000 wafers under the N5 process to the N3 process this year, which may lead to the dilution of gross profit margin. It is expected that the conversion will continue in 2025, but the scale will not be large, and TSMC will also launch new N3 production capacity. The overall N5 monthly production capacity is unlikely to exceed 140,000 wafers.
Will the price reduction of mature process nodes affect TSMC's gross profit margin in 2025?
The report stated that although TSMC has provided some price discounts on mature processes, the impact on overall revenue is small. The optional discount for N7 is 3-5%, and the discount for older nodes is relatively small, so it is unlikely to cause a big drag on gross margin in 2025.
Will capital spending exceed $40-45 billion in 2025?
Although many investors expect TSMC's capital expenditure guidance next year to exceed US$40 billion, the report believes that TSMC will adopt a more conservative guidance range at the beginning, with an initial estimate of US$36 billion, and may increase during the year.
The report explains that TSMC has adopted a more gradual approach to capacity addition in this cycle and is unlikely to directly announce a higher capital expenditure range. Moreover, TSMC's DPS (Dividend Per Share) is also rising steadily, which usually indicates that the growth rate of capital expenditures may be more cautious from now on.
The report also added that once TSMC reaches any N2 capacity agreement with Intel, it may trigger a new round of capital expenditures.