Bernstein: ASIC CPU Brings Additional Incremental Demand, Raises Target Price for TSMC (TSM.US) to $600

Zhitong Finance APP has learned that three months ago, Bernstein identified CPUs as a new growth driver for TSMC (TSM.US). The latest report has raised this assessment: the real change does not lie in GPUs or ASIC XPUs, but in the large-scale deployment of CPUs self-developed by Amazon and Google, with demand exceeding previous expectations.

Incremental Demand Comes from “ASIC CPUs,” Not AI Accelerators

The CPUs customized by Amazon and Google for internal use are only deployed internally and not sold externally. By nature, they are classified as ASICs, and Bernstein refers to them as “ASIC CPUs” to distinguish from ASIC XPUs designed for AI training and inference. While both demands are growing, the recent surprise lies in the accelerated demand for CPUs driven by agent-type workloads, especially the self-developed CPUs currently being deployed by these two cloud giants.

The report highlights another structural difference: In terms of ASIC CPUs, Amazon and Google are far more self-sufficient compared to XPUs and rely much less on ASIC design service providers. Amazon’s Graviton5 is already the fifth-generation self-developed CPU, manufactured with a 3nm process, featuring 192-core Arm Neoverse V3, and 172 billion transistors—all aspects from design to production arrangements with suppliers are handled internally. Google already has two generations of CPU design experience (Maple and the first generation of Axion). The second-generation Axion is self-designed, with only the production arrangement handed to Global Unichip Corp (GUC); this chip is benefiting from agent workloads and will ramp up quickly from the end of 2026 to 2027.

The key point is that this is additive rather than substitutive: these self-developed CPUs do not crowd out general-purpose CPUs from Intel and AMD but instead bring additional demand on top of both, all of which eventually translates to TSMC’s wafers—Graviton5 uses 3nm, and the second-gen Axion is in the N4 family.

CPU Revenue: From $24 Billion to $50 Billion, Proportion Rises from 7% to 16%

Bernstein projects TSMC’s CPU revenue from about $5 billion in 2023, around $10 billion in 2024, $14 billion in 2025, about $24 billion in 2026, all the way to about $40 billion in 2027, and about $50 billion in 2028; the proportion of total revenue will rise from 7% to 16%. To clarify definitions, this calculation excludes Apple’s self-developed CPUs used in PCs (for example, A18 Pro shared by iPhone 16 Pro/Pro Max and MacBook Neo), which also explains the slight data difference from the previous report.

In customer structure, AMD will consistently be the largest single CPU customer from 2026 to 2028, accounting for 50% to 60%; Intel’s share will drop from over 30% in 2025 to about 10% in 2028; Google and Amazon are still categorized as “Others” in 2025, but their contributions will rise markedly thereafter.

Process Differentiation: N3 and N2 Upgraded, N5 and N7 Under Pressure

Not all demand is improving across the board. PCs and low-end smartphones are weaker than expected, especially at the lower end, causing demand for N5 and N7 to soften slightly. N3 and N2, however, are shared by XPUs, CPUs, and high-end smartphone SoCs, making their demand more robust. Bernstein has thus revised up their revenue contributions.

The A14 will succeed N2 as scheduled, contributing considerable revenue starting in the second half of 2028. The transition from N2 to A14 will be only slightly longer than two years. Initial adopters include Apple, Qualcomm, MediaTek, and AMD; Nvidia will also adopt A14, but likely not until 2029—consistent with its late migration to N3 compared to other XPU suppliers. Leveraging CUDA and system-level integration, this timing has not affected its leading position in the AI XPU market. Overall, A14 will bring TSMC more revenue, in dollar terms, at the same stage than N2 and all previous nodes.

Capital Expenditure: $77 Billion in 2027, but Intensity Continues to Decline

Reflecting stronger demand, Bernstein has raised its capital expenditure forecasts from $63 billion in 2026 to $77 billion in 2027 and $83 billion in 2028. At the same time, it maintains the previous judgment that the CAPEX-to-revenue ratio will gradually decline, which is consistent with TSMC’s latest financial report statements.

Advanced packaging capacity is also slightly upgraded. TSMC’s internal CoWoS equivalent capacity will increase from about 60,000 wafers/month at the end of 2025 to about 135,000 in 2026, 175,000 in 2027, and about 180,000 in 2028. If we include OSAT providers such as ASE and Amkor, as well as Intel’s EMIB-T adjusted equivalent capacity, the total market capacity will rise from approximately 65,000 wafers/month at the end of 2025 to about 380,000 by the end of 2028. While EMIB-T’s substrate yield still needs improvement, guidance from MediaTek last week indicates that progress is on track, so Bernstein maintains its capacity forecasts.

Profitability and Valuation: 35% EPS CAGR with a 20x Forward P/E

According to the revised model, TSMC’s dollar revenue is expected to grow by 44%, 40%, and 27% in 2026, 2027, and 2028 respectively, reaching approximately $176 billion, $247 billion, and $315 billion. Considering the drag from N2 and overseas capacity, gross margin will remain roughly flat (66.6% in 2026 and 65.7% in 2027). EPS will grow in line with revenue, delivering about a 35% CAGR from 2026 to 2028. The revised 2026 EPS is NT$113.40 (previously NT$110.70), and 2027 EPS is NT$157.79 (previously NT$144.85). Compared to market consensus, 2026 Q4 EPS is 5% higher, 2027 is 6% higher, and 2028 is 10% higher.

The target price of NT$3,828 is based on a 20x forward P/E multiplied by quarterly EPS of NT$191 for Q4 2027 to Q3 2028; the ADR target price of $600 is directly converted at the exchange rate. In the near term, the report’s revenue forecast for Q4 2026 is NT$1.699 trillion, up 62.4% year-on-year but 0.5% below market consensus. EPS, however, is 5% higher than consensus—driven by margin and expense assumptions rather than a revenue advantage.

It’s important to note the position of the valuation: TSMC’s current forward P/E is about 16x, the seven-year average is 17.5x, and one standard deviation above average is 21.1x. The 20x used for the target price is already significantly above the historical average and close to the upper bound of one standard deviation, meaning that for a 60% upside, both valuation normalization and earnings upgrades contribute a part.