Taiwan Semiconductor Expects AI Revenue to Double in 2025

Needham analyst Charles Shi continues to endorse Taiwan Semiconductor Manufacturing Co (NYSE: TSM) with a Buy rating, setting a price target of $225.

Taiwan Semiconductor has guided for overall revenue growth in 2025 to be in the mid-20 percent range, which aligns with market consensus.

More notably, the company's management projected that AI revenue will double in 2025, having already tripled in size to represent the mid-teens percentage of total revenue in 2024.

Additionally, Taiwan Semiconductor has extended its AI revenue forecast horizon to 2029, predicting a compound annual growth rate (CAGR) of around 40% over the next five years. In terms of overall company growth, management indicated that long-term revenue CAGR is nearing 20%, compared to a previous estimate of 15% to 20%.

This outlook implies that non-AI revenue growth for 2025 is expected to be in the low teens, a decrease from the high teens reported in 2024. This does not necessarily signify a decline in non-AI growth but may reflect a conservative approach by management, suggesting they are not fully confident in a strong recovery in this segment for 2025.

Management also provided insights regarding the “Foundry 2.0” total addressable market (TAM), which encompasses conventional foundry operations, advanced packaging, and testing services, expected to grow by 10% in 2025, a rise from 6% in 2024.

As Taiwan Semiconductor represents about 34% of the Foundry 2.0 TAM, which is approximately $265 billion in 2024, its anticipated 25% growth in 2025 suggests stagnant growth for the remaining segments of the Foundry 2.0 market, which are largely independent of AI.

For 2025, Taiwan Semiconductor has projected capital expenditures (CapEx) to be between $38 billion and $42 billion, which is notably higher than the mid-$30 billion range previously anticipated by Shi. This adjusted CapEx represents about 35% capital intensity, adjusting from Shi's earlier expectation of a low 30% intensity.

According to the company, around 70% of this CapEx will be allocated toward advanced nodes, with 10% to 20% dedicated to specialty devices, and another 10% to 20% focused on packaging, testing, and photomask manufacturing. Historically, CapEx has typically been spent 70% to 80% on advanced nodes, with 10% to 20% on specialty devices, and 10% on other areas.

Although Taiwan Semiconductor did not disclose specific historical spending mixes, Shi noted that their guidance seems to suggest a reduction in spending on advanced nodes while back-end investments, particularly in packaging and testing, are on the rise.

Advanced packaging, in particular, is anticipated to grow faster than overall CapEx. As Moore's Law appears to slow, packaging is expected to play an increasingly crucial role in extending semiconductor capabilities. A key indicator of this shift is Taiwan Semiconductor's forecast for packaging revenue, which is expected to make up over 10% of total revenue in 2025, up from more than 8% in 2024.

Historically, packaging revenue accounted for about 7% to 8% of overall revenue, and the rapid growth in this area is anticipated to lead to more robust development of related CapEx.

On the side of advanced node spending, Taiwan Semiconductor has confirmed that more conversions from 5nm to 3nm technologies are expected in 2025. The company also confirmed that the second semiconductor fabrication plant in Arizona, designed for processes involving 3nm and smaller technologies, will begin receiving equipment by the end of 2025.

In previous announcements, Taiwan Semiconductor indicated that this second facility is projected to commence mass production in 2028. However, the acceleration of equipment installation suggests that this timeline may be pulled forward to 2027.

Market Reaction: As of the latest publication, shares of Taiwan Semiconductor have risen by 4.78%, currently trading at $216.69.

TSMC, AI, Revenue