Taiwan Semiconductor, the global chip foundry giant, will release its Q2 financial report next Tuesday.

According to compiled data from the media, the current market expects the company's Q2 revenue to grow by 36% YoY, the fastest growth since Q4 2022.

In the strong bullish sentiment, TSMC's stock price hit a new all-time high during regular trading hours of U.S. stock market overnight, and the company's market cap once reached $1 trillion.

In the research report released on July 7 by Morgan Stanley analysts Gokul Hariharan and Robert Hsu, they maintained a "shareholding" rating for TSMC and raised its 2025 target price to NT$1,080.

As for the financial report, Morgan Stanley predicts that TSMC's Q2 revenue will be $20.5 billion, with a gross margin of 53%, and its Q3 revenue will increase by 12%-15% QoQ to $23.3 billion, with a gross margin slightly reduced to 52.8%.

Long-term outlook, the report predicts that TSMC's full-year 2024 revenue in U.S. dollars will increase by about 27%, and is expected to increase by 24% in 2025, mainly due to the strong growth of AI chip foundry-related revenue, the development of edge AI, and the increase in adoption rate of N3 node by non-Apple customers.

The report also predicts that by 2025, due to the increase in prices of N3, N5 and CoWoS, as well as the cyclical nature of other process nodes, gross margin is expected to increase significantly to 58%.

Seven focuses are watched in this financial report.

In addition to financial data, Morgan Stanley pointed out that in TSMC's financial report next week, investors will focus on seven issues.

1. Will TSMC raise its revenue guidance and capital expenditure guidance for 2024?

The report predicts that at the earnings call next week, TSMC will raise the revenue guidance from a lower 20% range level (such as 18%-20%) to a higher 20% range level (such as 19%-21%).

But it is expected that TSMC will not raise its capital expenditure guidance, and its actual capital expenditure this year may reach the upper limit of the guidance due to the drag from N2 and advanced packaging investment.

2. What are the upside and downside risks to revenue growth in 2024/2025?

Morgan Stanley predicts that TSMC's demand for AI accelerators will be more active, especially due to the strong growth of Nvidia's GB200 and the continued strong demand for ASIC (mainly Broadcom's TPU) chips, and the demand for AI chip foundry will remain strong.

In addition, the market demand for high-end smartphones will further promote the revenue growth of the N3 process node. The report predicts that the capacity utilization rate of TSMC's N3 node will reach 110%-115% in the second half of 2024, and the capacity utilization rate of N4/N5 will also approach 100%.

However, the persistent low utilization rate of the relatively backward N7 process node is a potential downside risk.

3. Will TSMC convert N7 to other process nodes to cope with the current low utilization rate?

Technically, TSMC could convert N7/N6 to updated process nodes, but this may not be efficient.

The report believes that TSMC may wait for the next wave of growth in N7/N6 demand in the next 12-18 months before making the final decision to convert capacity.

4. Will TSMC raise prices for advanced nodes and lower prices for old nodes?

The report believes that the prices of advanced node processes have been basically determined - N3 and N5 prices may rise by 3-6%, and the prices of CoWoS advanced packaging may also rise by 8-10%.

For old node processes, TSMC is unlikely to lower prices comprehensively, but may adjust the prices of some N6/N7 nodes and 8-inch (200 mm) wafer orders that have newly increased demand in order to improve utilization.

Why does Morgan Stanley have such confidence in TSMC's gross margin in 2025?

Morgan Stanley's gross margin guidance for TSMC in 2025 (58%) is much higher than the market consensus (about 54%).

The report explains that confidence in TSMC comes from several factors: as most customers move to N3E, TSMC's yield will significantly improve; mid-single-digit price increases (covering more than 50% of revenue) will bring over 100 basis points of gross margin growth; with inventory adjustments ending and restocking driven by edge AI, periodic recoveries are expected for old process nodes (16nm and older).

The report predicts that at the peak of the upcycle, TSMC's gross margin can reach 50%-60%, which is expected to occur in 2026.

How is the progress of Intel's outsourcing, and will Intel's insourcing in 2026 pose a significant risk to TSMC?

Due to weak terminal demand, the progress of Intel outsourcing is slightly lower than expected.

But the report predicts that outsourcing will be boosted with the launch of Lunarlake and Arrowlake processors. TSMC does not need to worry about the decline of Intel's competitiveness in the PC CPU market, as all other PC CPUs are manufactured by TSMC. Secondly, the report predicts that Intel's insourcing may not start until the end of 2026, and at that time, its demand will not account for a large proportion, because AI will drive more intense market competition for PC CPUs.

Furthermore, the report predicts that Intel's insourcing may not start until the end of 2026, and at that time, its demand will not account for a large proportion, because AI will drive more intense market competition for PC CPUs.

Considering the strong AI demand and the increase in N2 adoption, will long-term capital expenditures increase significantly, and will the number of EUV lithography machines purchased increase to 30 per year?

The report predicts that due to N2's strong demand and continued investment in expansion in Japan, Arizona, and advanced packaging, TSMC's capital expenditures will increase to US$35-36 billion in 2025 and remain in the middle range of US$3 billion in the coming years.

The report believes that the purchase volume of EUV lithography machines is unlikely to exceed the peak level before (26-27 units in 2021-2022), and may reach 22-23 units in 2025.