We
raise
our
fair
value
estimate
on
Taiwan
Semiconductor
Manufacturing
(2330),
or
TSMC,
to
TWD
1,380
per
share
from
TWD
950
($213
per
ADR
from
$146)
owing
to
higher
pricing
expectations,
stronger
artificial
intelligence
demand,
and
plausible
upward
revision
in
its
full-year
revenue
guidance.
As
a
result,
we
increase
our
revenue
and
EPS
expectations
for
2024
to
2028
by
up
to
9%
and
17%,
respectively.
In
addition,
we
lowered
our
weighted
average
cost
of
capital
(WACC)
to
8.2%
from
9.3%
as
TSMC
is
closer
to
opening
overseas
plants
to
mitigate
geopolitical
risks
in
East
Asia.
Even
after
a
60%
year-to-date
share
price
rally,
we
view
TSMC
is
undervalued
as
potential
price
hikes
without
much
additional
capital
expenditure
would
disproportionately
improve
free
cash
flow.
Revenue
upside
from
edge
or
on-device
AI
has
become
more
visible,
in
our
view.
Apple
said
on
its
recent
Worldwide
Developers
Conference
that
it
will
take
a
hybrid
approach
in
handling
user
queries.
Simpler
queries
will
be
handled
on-device
instead
of
being
sent
to
remote
cloud
servers.
We
take
this
as
validation
to
chip
designer
MediaTek’s
earlier
declarations
that
edge
AI
will
gain
prominence
as
more
AI
models
are
trained.
We
expect
both
Android
and
iOS
smartphones
to
enable
on-device
AI
processing
over
the
next
three-to-five
years,
which
directly
leads
to
10%-20%
more
silicon
content
on
smartphones.
Datacentre
AI
also
contains
pleasant
surprises.
First,
Apple
says
it
will
run
complex
queries
on
“dedicated
Apple
silicon
servers,”
which
we
interpret
as
incremental
semiconductor
demand
for
TSMC
structurally,
given
Apple
has
to
maintain
and
expand
a
vast
fleet
of
datacenters
to
handle
user
queries.
Second,
top-10
customer
Broadcom
raised
its
full-year
guidance
from
AI-linked
chips
by
10%.
Third,
Nvidia
accelerated
its
datacenter
GPU
refresh
cycle
to
annually
from
biennially,
which
may
speed
up
expansions
if
total
cost
of
ownership
reduction
is
proven.
TSMC
is
likely
to
benefit
from
boosts
in
smartphone
and
PC
chipsets
demand.
Per
Business
Korea,
Qualcomm
and
Google
are
poised
to
manufacture
next-generation
3nm
smartphone
chips
at
TSMC
instead
of
Samsung.
The
news
is
not
a
surprise
as
we
understand
Samsung
is
struggling
with
3nm
production
and
faces
wider
organisational
issues.
We
estimate
3nm
smartphone
chipsets
will
be
over
25%
more
expensive
than
5nm
ones
before
factoring
AI-driven
silicon
content
growth.
In
other
news,
Qualcomm
has
debuted
laptop
AI-enabled
chips
made
by
TSMC
that
potentially
chips
into
Intel’s
decadelong
dominance.
We
see
battery
life
as
a
compelling
selling
point,
and
the
end
of
Windows
10
support
could
catalyse
demand.
MediaTek
may
soon
join
the
fray
with
its
AI
PC
chip,
but
that
is
more
likely
in
2026.
Every
10%
market
share
in
PC
chips
by
Qualcomm
and
MediaTek
combined
adds
about
$9
billion
in
TSMC’s
revenue.
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