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Even though TSMC just experienced a record drop, Morgan Stanley remains optimistic.

Morgan Stanley analysts' latest report lists TSMC as a top pick, believing that the stock's valuation is attractive after recent weak performance. Morgan Stanley analyst Charlie Chan wrote in the report: "In the long-term semiconductor down cycle, we are optimistic about TSMC's quality and defensiveness." He also pointed out that "confirmation of price increases and continued strength in artificial intelligence (AI) capital expenditures should be (TSMC) The key catalyst."

Chan predicts that with price increases, "TSMC should be able to achieve a gross margin of more than 55% in 2025, and gradually approach the 60% gross margin level from 2028 to 2030 after achieving economies of scale in overseas wafer fabs."

On the same day that Morgan Stanley issued a report that was optimistic about TSMC, on Monday, the share price of TSMC, listed in Taipei, China, closed down nearly 9.8%, the largest single-day drop since its listing. As TSMC and other leaders fell sharply, all sectors of the Taiwan stock market were wiped out that day, and the Taiwan Stock Exchange Weighted Stock Price Index closed down 8.4%, also setting a record for the largest single-day drop.

The Taiwan Stock Exchange held a press conference on Monday afternoon to explain the recent stock market changes and the corresponding measures. The Taiwan Stock Exchange said that it will take measures to stabilize the market if necessary. So far, there is no need to introduce market stabilization measures. The fundamentals of the Taiwan stock market are still strong.

Compared with the sharp drop in its Taiwan-listed stock price, the decline in TSMC's US stocks listed on the New York Stock Exchange on Monday was significantly eased. It fell by about 10.9% at the beginning of the session, but eventually closed down nearly 1.3%. It turned to rise after the market and rose by nearly 2%.

Adam Lin, an analyst at Moore Securities Investment Consulting, commented that judging from the decline of TSMC, investors were indiscriminately eager to reduce their holdings on Monday, ignoring TSMC's good fundamentals. Lin mentioned that the Tokyo stock market plunged 12.40% and the Seoul stock market plunged 8.7% last Friday, saying that "they (investors) were just scared by the emergence of systemic risks because the weakness of the US market triggered a sell-off in the region." In addition, Monday's regional sell-off also reflected the increased tensions in the Middle East.

More than two weeks ago, TSMC announced second-quarter sales, net profit, and gross profit margin that were higher than expected. Net revenue for the quarter exceeded expectations, increasing by 40.1% year-on-year, net profit exceeded expectations by 36.3%, and gross profit margin was 53.2%, higher than TSMC's entire guidance range of 51%-53%, and higher than analysts' expectations of 52.6%. TSMC also raised its sales guidance for this year, raising its full-year sales growth forecast in US dollars to above the mid-20% range, from 21%-26% to 24%-26%.

TSMC's growth is mainly due to the recent strong demand in the fields of AI and high-performance computing. In the second quarter, TSMC's AI chip foundry business continued its strong momentum, and the smartphone business recovered steadily with the boost of increased iPhone shipments. HPC (high-performance computing) platform revenue accounted for the highest proportion, reaching 52%, a significant increase of 28% month-on-month; smartphone business revenue accounted for 33%, automotive business accounted for 5%, IoT accounted for 6%, and DCE business accounted for 2%.

When announcing its second-quarter financial report, TSMC also raised the lower limit of its full-year capital expenditure guidance, expecting full-year capital expenditures to be between US$30 billion and US$32 billion. The entire guidance range is higher than the market estimate of US$29.55 billion. The previous guidance was US$28 billion to US$32 billion.

TSMC Chairman and President Wei Zhejia said in the earnings call that the reason for raising the lower limit of the full-year capital expenditure guidance was mainly due to higher growth opportunities. The revenue exceeding the guidance this quarter mainly benefited from the demand for N3 and N5 processes. Wei Zhejia also pointed out that in the past three months, strong AI and smartphones have supported demand, and the 5-nanometer process is expected to maintain a high level in the second half of the year. It is expected that this year will be "a very strong year for our growth, and the revenue growth rate is expected to be slightly higher than the mid-20% in US dollars."