Morgan Stanley promotes TSMC stock to Top Pick after Monday crash

Morgan Stanley (NYSE:MS) has elevated Taiwan Semiconductor Manufacturing Company (TSMC) to its top pick status following a significant market selloff.

The investment bank highlighted TSMC's quality and defensive nature, which it says is particularly valuable during an extended semiconductor downturn.

Morgan Stanley believes that TSMC's confirmed price hikes and robust AI capital expenditure will serve as key catalysts for the company's performance.

"Price hike confirmation and ongoing AI capex strength should be key catalysts," Morgan Stanley analysts noted, emphasizing the stock's attractiveness at 16 times the estimated 2025 earnings per share.

Despite a sluggish recovery in non-AI sectors, the bank's analysts argue that TSMC's strategic moves in AI demand and capacity expansion justify its elevated position.

In terms of pricing, Morgan Stanley reports that TSMC has finalized its 2025 wafer price hikes, with AI semiconductor and CoWoS prices set to increase by 10%, high-performance computing by 6%, and smartphone/consumer prices by 3%.

"TSMC's margin improvement via its price hike should be realized," the note stated, predicting the company will deliver over 55% gross margin in 2025, potentially approaching 60% between 2028 and 2030 as overseas fabs scale up.

The analysts also addressed potential discounts for mature node customers facing competition from Samsung (KS:005930) foundry and Chinese fabs. They believe these discounts could enhance TSMC's mature nodes utilization and counteract average selling price erosion, thereby maintaining overall profitability.

Morgan Stanley is optimistic about TSMC's position in the evolving semiconductor market, particularly with its Foundry 2.0 strategy. This approach is said to encompass IDM manufacturing, photomask production, and backend foundry services, which could significantly expand TSMC's total addressable market.

"TSMC should be able to deliver >55% gross margin in 2025," the analysts reaffirmed, suggesting that AI semiconductor customers will support these margins. Given these factors, Morgan Stanley sees TSMC as a resilient and lucrative investment amid market volatility.