Ahead of Earnings Report, Bank of America Raises Target Price for TSMC: 2nm Capacity Ramp-Up Boosts Sales Expectations and Profit Margins

TSMC will announce its Q3 earnings on Thursday. Bank of America Merrill Lynch expects TSMC’s Q3 revenue to exceed expectations, with the strong ramp-up of the 2nm process being the core growth driver. Ahead of the earnings release, the bank raised its target price and maintained its Buy rating.

According to Chasing Wind Trading Desk, in a research report issued by Bank of America Merrill Lynch on October 12, analyst Haas Liu raised the target price for TSMC’s US-listed shares (TSM) from $590 to $620 (and the Taiwan-listed target price from NT$3,100 to NT$3,260), while also revising up 2026-2028 earnings per share forecasts by 2% to 9%.

The key rationale behind this upgrade lies in: Accelerated ramp of the 2nm process has driven Apple’s mobile SoC and AMD server CPU demand beyond expectations, complemented by several GPU and ASIC products migrating to 3nm, pushing Q3 revenue above the top end of guidance and setting a solid foundation for Q4 sales growth.

Bank of America forecasts TSMC’s Q4 revenue to grow 10% to 15% quarter-over-quarter, with full-year revenue likely to achieve over 40% year-on-year growth, in line with previous company guidance. Meanwhile, despite cost pressures from 2nm capacity ramp and overseas fab expansions, Bank of America expects Q3 and Q4 gross margins to stay at 67.0% and 67.8% respectively, below the recent market optimism of 67%-69%. However, overall profit margin resilience remains prominent. TSMC ADR shares have surged over 48% year-to-date, and Bank of America’s new target price implies about 37% upside from current levels.

Q3 Revenue Expected to Exceed Expectations, 2nm Ramp as Key Driver

According to Bank of America Merrill Lynch’s research report, TSMC’s Q3 revenue calculated in New Taiwan Dollars is expected to grow 18% quarter-over-quarter, surpassing Bank of America’s and the market’s already optimistic estimates of 14% and 13%. Using an average exchange rate of NT$31.99 per US dollar, Q3 USD revenue could reach $46.67 billion, exceeding the company’s guidance range of $44.6-45.8 billion.

Bank of America believes the key driver for this outperformance is the rapid ramp of the 2nm process. The bank estimates 2nm accounted for around 11% of Q3 revenue, up from 3% in Q2, mainly benefitting from Apple’s new product cycle mobile SoC stocking and strong growth in AMD Venice server CPU demand. At the same time, additional inventory stocking of flagship smartphone SoCs from Mediatek and Qualcomm also provided supplementary support, although stocking was below seasonal levels due to weaker Android demand.

For the 5nm and 3nm nodes, Bank of America expects capacity utilization to remain above 100%, driven primarily by strong demand for high-performance computing and AI workloads, including robust demand for Nvidia Rubin GPUs, AMD MI400, AWS Trainium3, and other accelerators, as well as continued growth in server CPU and network switch chips.

Q4 Outlook: Blended ASP Push to Sales, Gross Margin Below Market Expectations

Bank of America expects TSMC Q4 revenue to grow around 11% quarter-over-quarter, outperforming the 10-year seasonal average of 7%. The main drivers come from continued product mix migration to advanced nodes: Revenue from 5nm and below is expected to rise from 71% in Q3 to 75% in Q4, and the 2nm contribution is expected to expand to 18%, with wafer pricing more than 15% higher than 3nm.

However, Bank of America’s Q4 gross margin forecast is more conservative than the consensus. The bank expects gross margin at around 67.8%, lower than the recent market expectation of 68%-69%. The reasons include: a 25%-30% quarter-over-quarter increase in depreciation due to 2nm capacity ramp and overseas fab expansion slated for H2 2026; and as the revenue share of 2nm expands, ramp-up yields may dilute gross margin by 3 to 4 percentage points in Q4.

Bank of America’s earnings forecast for 2026-2028 is 5%-15% higher than consensus, mainly based on assumptions of stronger sales growth. It projects that TSMC’s earnings per share for 2026, 2027, and 2028 will be NT$112, NT$161, and NT$203, respectively.

CapEx Expansion to Continue, Expected to Exceed $83 Billion in 2027

With robust demand outlook, Bank of America expects TSMC’s 2026 CapEx to reach about $63 billion, at the high end of company guidance of $60-64 billion. Expenditure is focused on advanced front-end manufacturing, including 3nm capacity expansion to about 55k-60k wafers/month, 2nm ramp to about 60k wafers/month, and initial A16 capacity installation of about 3k-5k wafers/month.

Looking ahead to 2027, Bank of America expects CapEx to further surge to about $83 billion, driven by ongoing N3, N2, A16, and CoWoS-L expansions, as well as initial volume production preparation for CoPoS and CPO technologies. The bank estimates TSMC’s CapEx CAGR from 2026 to 2028 at around 20%.

Notably, equipment suppliers plan to raise prices for front-end manufacturing equipment by 10%-15% and back-end packaging equipment by 5%-10% from 2027, which could push TSMC’s CapEx up by an additional ~10%. Bank of America believes the company’s relative bargaining power along the supply chain enables it to pass on these costs to customers through wafer foundry pricing when new equipment comes online in H2 2027, expecting TSMC to raise advanced node wafer prices by 5%-10% in Q1 2027.

Despite the sharp increase in CapEx, Bank of America expects depreciation CAGR to be 21%, lower than revenue CAGR of 32% from 2026 to 2028, supporting gross margin expansion to 68%-69% by 2028.

Leading Technology Advantage Expands, Competitive Dynamics Remain Solid

Bank of America believes TSMC’s leading position in advanced node technology is further solidifying. In terms of transistor density, TSMC’s N3/N3E nodes are about 30% ahead of Intel 3/18A. Looking ahead, Bank of America estimates TSMC’s A16/A12 nodes will widen the transistor density advantage over Intel’s 18A-P/14A nodes to about 50%-60%.

In backend packaging, TSMC is advancing its CoWoS technology, with the 5.5x reticle size version entering mass production in 2026 with yields above 98%. The company plans to stretch this technology to 9.5x-14x reticle limits between 2027 and 2028. Bank of America expects industry-wide CoWoS-R/L supply to grow at a 52% CAGR from 2026-2028 to meet demand, with TSMC continuing to dominate the complex GPU and ASIC packaging market.

Regarding market concerns about potential competition from Elon Musk’s Terafab, Bank of America sees the risk as overestimated. The bank notes that even with a $119 billion ten-year investment plan, Terafab could only build up to 96k wafers/month advanced node capacity by 2036, far below TSMC’s scale, and is currently facing client certification delays for Intel 18A. Instead, Bank of America believes SpaceX may become a key anchor customer for TSMC, consuming about 20% of TSMC’s advanced node capacity in 2029.

Bank of America maintains its Buy rating on TSMC, with the target price based on 20x expected 2027 P/E. Haas Liu notes that TSMC’s current PE for 2027 is about 16x, in the mid-range of its historical valuation (11-21x). Considering TSMC’s leadership in advanced nodes, the current valuation is “not demanding.”

Bank of America notes that TSMC’s key clients currently trade at a 45% PE premium to TSMC, higher than the long-term average of 22%, with HPC clients paying a 100%-150% premium, well above the historical average of 53%. The bank thinks TSMC stock’s gains in the past two years have mostly come from earnings upgrades rather than multiple expansion. With further strengthening of TSMC's technology leadership, re-rating towards at least 20x NTM PE is possible.