Bernstein: ASIC CPUs bring further incremental demand, raises Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) price target to $600.

Bernstein listed CPUs as a new growth driver for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) three months ago, and its latest report raises that call another notch: the real change is not in GPUs or ASIC XPUs, but in the scale deployment of in-house CPUs developed by Amazon.com, Inc. and Alphabet Inc. Class C, which is driving demand beyond prior expectations. The incremental volume comes from "ASIC CPUs," not AI accelerators The CPUs custom-built by Amazon.com, Inc. and Alphabet Inc. Class C for their own use are deployed only internally and not sold externally, making them ASICs in nature; Bernstein calls them "ASIC CPUs" to distinguish them from ASIC XPUs aimed at AI training and inference. Demand for both is growing, but the recent surprise is that agentic workloads are accelerating CPU demand, especially for the in-house CPUs the two cloud providers are deploying. The report highlights another structural difference: on ASIC CPUs, Amazon.com, Inc. and Alphabet Inc. Class C have a far higher degree of self-sufficiency than on XPUs, with much less reliance on ASIC design service providers. Amazon.com, Inc.'s Graviton5 is already its fifth-generation in-house CPU3nm process, 192 Arm Neoverse V3 cores, 172 billion transistorswith everything from design to production arrangements with suppliers held in-house; Alphabet Inc. Class C had prior experience with two generations of CPU designs (Maple and the first version of Axion), and the second-generation Axion was designed in-house, with only production arrangements handed to Global Unichip (GUC); that chip is benefiting from agentic workloads and ramping rapidly from late 2026 through 2027. The key point is that this is additive rather than substitutive: these in-house CPUs do not displace general-purpose CPUs from Intel Corporation and AMD, but add demand on top of them, and ultimately all of it lands on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR wafersGraviton5 uses 3nm, and the second-generation Axion lands in the N4 family. CPU revenue: from US$24 billion to US$50 billion, share rising from 7% to 16% Bernstein extrapolates Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR CPU revenue from about US$5 billion in 2023, about US$10 billion in 2024, about US$14 billion in 2025 and about US$24 billion in 2026, all the way to about US$40 billion in 2027 and about US$50 billion in 2028; the share of total revenue rises accordingly from 7% to 16%. To clarify the scope, this estimate excludes the in-house CPU Apple Inc. uses in PCs (for example, the A18 Pro shared by the iPhone 16 Pro/Pro Max and MacBook Neo), which is also the reason for the small difference from the historical data in the previous report. On customer structure, AMD remains the largest single CPU customer from 2026 to 2028, holding a 50% to 60% share; Intel Corporation's share falls from above 30% in 2025 to about 10% in 2028; Alphabet Inc. Class C and Amazon.com, Inc. were still grouped under "others" in 2025, after which their contribution rises markedly. Node divergence: N3 and N2 revised up, N5 and N7 under pressure Demand is not uniformly strong. PCs and low-end smartphones are weaker than expected, especially at the low end, softening N5 and N7 demand slightly; N3 and N2 are shared by XPUs, CPUs and high-end smartphone SoCs, making demand firmer, and Bernstein accordingly raises their revenue contribution. A14 succeeds N2 on schedule, contributing meaningful revenue starting in the second half of 2028, with the cadence from N2 to A14 only slightly longer than two years. The first adopters are Apple Inc., Qualcomm, MediaTek and AMD; NVIDIA Corporation will also adopt A14, but not until 2029consistent with its failure to migrate to N3 as early as other XPU suppliers did that year, and given its advantages in CUDA and system-level integration, this cadence has not affected its leading position in the AI XPU market. Overall, A14 will still bring Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR more revenue dollars at the equivalent stage than N2 and all prior nodes. Capex: US$77 billion in 2027, but capex intensity still declining Reflecting the upward revision to demand, Bernstein raises its capex forecast from US$63 billion in 2026 to US$77 billion in 2027 and US$83 billion in 2028. It maintains its prior view that capex as a share of revenue will gradually decline, consistent with Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's comments on its most recent earnings call. Advanced packaging capacity is also revised slightly higher. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's own CoWoS-equivalent capacity rises from about 60,000 wafers per month at end-2025 to about 135,000 in 2026, about 175,000 in 2027 and about 180,000 in 2028; including the converted equivalent capacity of OSATs such as ASE and Amkor and Intel Corporation's EMIB-T, total market capacity rises from about 65,000 wafers per month at end-2025 to about 380,000 wafers per month at end-2028. EMIB-T substrate yields still need improvement, but guidance from MediaTek last week indicates improvement is on track, so Bernstein maintains its capacity forecast. Earnings and valuation: 35% EPS CAGR paired with 20x forward P/E Under the revised model, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's US-dollar revenue grows 44%, 40% and 27% in 2026, 2027 and 2028, respectively, corresponding to about US$176 billion, US$247 billion and US$315 billion; accounting for the drag from N2 and overseas capacity, gross margin is roughly flat (66.6% in 2026, 65.7% in 2027), and earnings per share grows at the same rate as revenue, for a 2026-2028 CAGR of about 35%. Revised 2026 EPS is NT$113.40 (previously NT$110.70) and 2027 EPS is NT$157.79 (previously NT$144.85); versus consensus, fourth-quarter 2026 EPS is 5% higher, 2027 is 6% higher and 2028 is 10% higher. The price target of NT$3,828 is based on 20x forward P/E multiplied by fourth-quarter 2027 through third-quarter 2028 EPS of NT$191; the US ADR price target of US$600 is converted directly at the exchange rate. Near term, the report forecasts fourth-quarter 2026 revenue of NT$1.699 trillion, up 62.4% year over year, 0.5% below consensus; EPS is 5% above consensusrevenue is not the advantage, and the excess comes from margin and expense assumptions. The valuation position needs to be noted: Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR currently trades at about 16x forward P/E, versus a seven-year average of 17.5x and a plus-one-standard-deviation level of 21.1x. The 20x used for the price target is already significantly above the historical average and approaching the upper edge of plus one standard deviationmeaning that of the 60% upside, valuation re-rating and earnings revisions each account for a portion.