Needham analyst Charles Shi has reaffirmed his 'Buy' rating for Taiwan Semiconductor Manufacturing Company (TSMC) while raising the price target from $210 to $225. This adjustment comes in response to TSMC's robust third-quarter performance, especially in its 3nm technology, largely propelled by Apple Inc. However, while 3nm technology thrives, Shi notes a plateau in the 5nm revenue after six quarters of significant growth. Shi maintains a bullish outlook with a belief that $110 billion remains the correct revenue target for 2025, with expectations of substantial margin improvements.
As TSMC gears up for the future, Shi anticipates a return to a 60% gross margin by the latter half of 2025. Notably, no 2nm production is expected in the coming year, which otherwise could impact margins negatively. This margin optimism led to revisions in Shi's earnings per share (EPS) estimates and an increased price target. With 2024 revenue projections potentially reaching $90 billion and further growing to $110 billion in 2025, representing a 23% growth rate, Shi’s forecast gains traction among market analysts. Consensus estimates have rallied around the $110 billion mark, a notable uptick from last year's $96 billion predictions.
Shi adopts a cautious stance on future utilization rates. While there could be an upside if rates for 7nm and above resume to 2022 levels, his model assumes a more gradual recovery. For 2025, the reliance on volume rather than price for growth is expected, as 5nm capacity growth stabilizes and 3nm expansions decelerate. The year 2024 has seen about an 8% boost in wafer shipments and a 20% increase in average selling prices (ASP). However, for 2025, Shi projects shipments to grow by 13% with a more modest 10% ASP rise. This includes minor price increases on 5nm and 3nm products.
Shi identifies the lack of a new node ramp in 2025 as a potential factor for margin enhancement. While 2nm will not be feasible until 2026, enabling TSMC to benefit from decreased 3nm dilution effects. Hence, it anticipates that depreciation, linked to the ongoing 3nm ramp, will climb by 30% in 2024. However, only a modest 5% depreciation increase is forecasted for 2025, with margins edging towards 60% towards year-end.
Expectations have grown around TSMC’s capital expenditures (CapEx) for 2025, shifting from mid-$30 billion to near $40 billion. Shi, however, cautions against this optimistic outlook. He indicates that the majority of the 2025 CapEx will be directed towards 2nm expansion, with no plans for added capacity in other nodes. TSMC has confirmed prospective conversions from 5nm to 3nm, negating further 3nm expansions.
Shi pencils in $35 billion for CapEx in 2025, translating to a capital intensity rate of 32%. His forecast suggests a scenario where TSMC could expand its free cash flow margin beyond the current 32% estimate for 2024. Strong free cash flows could boost the firm's return on equity (ROE) beyond 30%. If TSMC maintains its strategy of returning 70% of free cash flow to shareholders, this could set the stage for dividend increases, ultimately having a positive impact on the stock’s outlook. Currently, TSM stock has seen a slight decline, trading at $202.12, down by 1.81% as of the latest update.