Taiwan Semiconductor Manufacturing's Q4 financial results and forward guidance both surpassed market expectations, yet investor focus has shifted from the performance itself to deeper strategic questions. Days after announcing strong earnings, the world's largest foundry is facing investor scrutiny over its aggressive expansion strategy, including why it significantly raised its capital expenditure guidance and why such an aggressive capacity layout is necessary. According to analysis, Morgan Stanley analysts including Charlie Chan noted in a latest research report that while Taiwan Semiconductor Manufacturing's stock rose 4% over two trading sessions post-earnings, investors are now posing more strategic questions rather than merely reacting to the results. Morgan Stanley believes that beyond strong AI semiconductor growth, potential equipment supply constraints are another reason Taiwan Semiconductor Manufacturing needs to aggressively book equipment or expand capacity. Otherwise, if demand aligns with customer expectations in 2-3 years, the company risks losing market share. Furthermore, following Taiwan Semiconductor Manufacturing's tariff agreement with the U.S. government, the market is watching whether the company will further increase its American investments. Under the agreement, Taiwan needs to make direct investments totaling $250 billion, with Taiwan Semiconductor Manufacturing expected to contribute the majority share.

Behind the aggressive capital expenditure lies a full-court press to protect market share. Taiwan Semiconductor Manufacturing's 2026 capital expenditure guidance of $52-56 billion exceeds market expectations by approximately $6-11 billion, sparking widespread discussion about this aggressive investment plan. Morgan Stanley analysts suggest that potential equipment supply tightness, alongside robust AI semiconductor growth, is driving Taiwan Semiconductor Manufacturing's need for aggressive equipment bookings and capacity expansion. Failure to do so could risk market share loss if demand meets client projections in 2-3 years. Analysts point out that Taiwan Semiconductor Manufacturing is accelerating infrastructure development, including but not limited to advanced packaging plants AP9 and AP10 on newly acquired U.S. land. Even with an additional $1-2 billion in infrastructure capital expenditure, the updated guidance remains aggressive. This raises the possibility of Taiwan Semiconductor Manufacturing prepaying for some equipment to smooth out capital expenditure between 2026 and 2027. Notably, Taiwan Semiconductor Manufacturing's capital intensity is expected to decline significantly as revenue grows substantially. Despite record 2026 capital expenditure, the capital expenditure-to-revenue ratio should drop markedly as capacity comes online during 2027-2028.

Capacity expansion and production efficiency improvements. Taiwan Semiconductor Manufacturing's 2026 revenue guidance of nearly 30% year-over-year growth exceeds market expectations, with this upward revision primarily attributed to enhanced production efficiency. Analysts attribute the raised revenue guidance to improved production efficiency, noting that Taiwan Semiconductor Manufacturing is pushing for higher wafer output to meet customer demand. They do not anticipate additional mid-year wafer price increases. Taiwan Semiconductor Manufacturing has raised its long-term gross margin guidance from 53% by 3 percentage points to 56% and above, reflecting the company's confidence in AI opportunities and the sustainability of production efficiency gains. Morgan Stanley expects Taiwan Semiconductor Manufacturing to comfortably achieve gross margins exceeding 56% even with increased capital expenditure. The company's margin enhancement strategy—including production efficiency improvements, mature process consolidation, and outsourcing low-margin businesses—appears sustainable. Consequently, analysts have raised their 2026 gross margin assumption to 63%.

Core catalysts: AI demand driving future growth. The next catalysts most closely watched by investors primarily revolve around the AI market. Morgan Stanley identifies several key drivers for Taiwan Semiconductor Manufacturing's stock: Global cloud service provider capital expenditure guidance: 2026 capital expenditure guidance from global cloud service providers will directly impact Taiwan Semiconductor Manufacturing's order visibility. Management has directly communicated with global CSPs, confirming that chip supply—not power supply—is the real bottleneck. AI semiconductor market size expansion: Morgan Stanley forecasts the global AI semiconductor total addressable market will grow from current levels to $550 billion by 2029. AI semiconductors already represent a mid-teens percentage of Taiwan Semiconductor Manufacturing's 2025 total revenue and are expected to reach 20-25% by 2026. NVIDIA GTC conference: Scheduled for March, NVIDIA's GTC event will provide crucial guidance on AI chip demand, potentially further validating Taiwan Semiconductor Manufacturing's aggressive expansion strategy. AI client quarterly results: Earnings reports from major AI clients will directly influence market judgments about the sustainability of AI semiconductor demand, which is crucial for Taiwan Semiconductor Manufacturing maintaining high capital expenditure intensity. Taiwan Semiconductor Manufacturing has raised its AI semiconductor revenue growth expectation from 45% to a 55-59% compound annual growth rate (2024-2029), approaching Morgan Stanley's 60% forecast.

The company has raised its overall revenue growth outlook from 20% to 25% (2024-2029 CAGR). Management confirmed during the earnings call, through direct communication with global cloud service providers, that power supply likely isn't the bottleneck—chip supply is. Analysts believe AI semiconductors already account for a mid-teens percentage of 2025 revenue, and considering their growth exceeds the company average, reaching 20-25% by 2026 is plausible. Even assuming moderate growth for PC and smartphone semiconductors, and 30-40% growth for general servers and networking, the assumption that "AI semiconductor revenue nearly doubles" appears reasonable. Regarding U.S. investment, under the Taiwan-U.S. tariff agreement requiring $250 billion in direct investment, Taiwan Semiconductor Manufacturing is expected to contribute the majority. A year ago, the company announced plans to invest $165 billion in the U.S. by 2030, with 30% of its 2nm and below capacity located there. Analysts believe Taiwan Semiconductor Manufacturing will accelerate U.S. capacity expansion to meet client demand, noting the company's mention during the earnings call of purchasing larger land plots in Arizona. According to reports, the new campus could add five wafer fabs plus new advanced packaging plants AP9 and AP10. Top pick: Target price NT$2,088. Taiwan Semiconductor Manufacturing maintains leadership in advanced node foundry services, with management expressing confidence in market share trends. Regarding foundry competition, management indicated that advanced node foundry services require years to mature, and Taiwan Semiconductor Manufacturing remains confident about its market share trajectory. Analysts consider Taiwan Semiconductor Manufacturing their top pick, reflecting strong AI capital expenditure guidance. From a valuation perspective, Taiwan Semiconductor Manufacturing currently trades at 15 times analysts' 2027 EPS forecast, near its average forward P/E of 16.5x since 2018. Analysts find this level very attractive.

Morgan Stanley maintains its 12-month target price of NT$2,088 using a residual income valuation model, with key assumptions including a cost of equity of 9.2% (beta 1.2, equity risk premium 6.0%, risk-free rate 2.0%), mid-term growth of 10.5%, and terminal growth of 4%. Analysts note that reflecting enhanced pricing power, long-term gross margin expansion, and sustainable AI semiconductor demand, the stock is expected to reprice to an implied 2027 target P/E of approximately 19x. Taiwan Semiconductor Manufacturing dominates the foundry service sector, benefiting from EUV technology and material breakthroughs, major technological trends like AI-driven global semiconductor revenue growth, and increasing demand for leading-node processes.