UBS noted in a research report released recently that in the wafer foundry market, the serviceable total addressable market (TAM) for the N2 (2nm) node far exceeds expectations, A14 (1.4nm) expansion is accelerating, and the upcycle for mature nodes has already begun.
N2 Demand Inflection Exceeds Expectations
UBS's bottom-up proprietary analysis of the N2 wafer foundry TAM shows that by 2028, demand is expected to surge to 320k wafers per month, significantly higher than the firm's forecast of about 230k wafers per month a year ago.
UBS stated that the demand increase is mainly driven by stronger server CPU demand and accelerating AI computing deployment, especially as more ASIC projects enter mass production alongside GPUs in the coming years.
At the same time, as execution improves, the firm expects Intel to migrate a larger proportion of PC CPU production to the 18A process.
Consequently, UBS estimates that by 2028, server CPUs and accelerators will account for 54% of N2 wafer foundry demand, up from the previous forecast of 44%; PCs are expected to contribute 19%, and smartphones/tablets 26%.
The larger market opportunity for N2 will support TSMC (TSM.US), as the world's leading wafer foundry supplier, in maintaining strong revenue growth in 2028-2029, even as competition slightly intensifies from Samsung Foundry, Intel (INTC.US), and Tesla's (TSLA.US) Terafab project.
N3/N2 and A14 Expansion Accelerates
To meet higher N2 demand expectations, UBS raised its forecast for global N2 capacity by the end of 2028 from the previous 230k wafers per month to 312k wafers per month.
The firm expects TSMC's N2 capacity to reach 210k wafers per month in 2028, up from its previous forecast of 160k wafers per month.
Intel will also expand capacity more aggressively, with its internal CPU production capacity expected to exceed 60k wafers per month by 2028, compared with the firm's previous forecast of 40k wafers per month.
Meanwhile, stronger cloud AI demand in 2027-2028 prompted UBS to raise its forecast for global N3 (3nm) capacity in 2028 from the previous 270k wafers per month to 290-300k wafers per month, with the entire increase driven by faster expansion at TSMC.
TSMC's A14 node is still expected to enter mass production on schedule in 2028, supported by steady R&D progress and increasing customer engagement.
Industry feedback indicates that TSMC is advancing its expansion plans ahead of schedule. According to UBS estimates, when the A14 node enters mass production, TSMC plans to achieve about 60k wafers per month of A14 capacity in 2028.
Given the more aggressive advanced node expansion plans, the firm raised its TSMC capital expenditure forecast from US$63 billion this year to US$90 billion in 2027 and US$105 billion in 2028.
Mature Node Wafer Foundry: Improving Supply-Demand and Pricing Outlook for 2027-2028
UBS earlier proposed a contrarian view to market consensus, namely that the mature node wafer foundry industry will enter an upcycle, driven by industry-wide supply and resource reallocation.
Since 2026, capacity utilization and pricing trends have continued to improve, and UBS expects more pronounced earnings upside in 2027-2028.
The firm's latest analysis shows that, supported by growing server PMIC demand, 8-inch wafer foundry capacity utilization could rise to 95% in 2027, up from 85% in 2026.
Although demand for 12-inch 28/40nm processes may be dragged down in the short term by weak smartphone and consumer electronics demand, UBS still expects capacity utilization to rise from 84% in 2026 to 88% in 2027, supported by modest capacity growth.
The firm also believes that the competitive behavior of Chinese wafer foundries should remain rational in 2027, as major players increasingly shift capital allocation priorities toward advanced node technologies.
Stock Recommendations
UBS reiterated its "Buy" rating on TSMC and expects market forecasts for 2027-2028 revenue, earnings per share (EPS), and capital expenditure to be further revised upward.
In the mature node wafer foundry space, United Microelectronics Corporation (UMC.US) remains the firm's top pick, as it should be one of the main beneficiaries of capacity spillover from large foundries, while silicon photonics and advanced packaging businesses will also provide additional upside.
UBS is also bullish on Powerchip Semiconductor Manufacturing Corporation and Semiconductor Manufacturing International Corporation, while maintaining a "Neutral" rating on GlobalFoundries (GFS.US), Vanguard International Semiconductor Corporation, and Hua Hong Semiconductor.
Risks
UBS added that the semiconductor industry is relatively sensitive to economic cycles, so both upside and downside risks are related to macroeconomic drivers.
Other specific downside risks related to semiconductor capital equipment include rapid market share loss due to factors such as product launch timing, product performance, design, or distribution.
Supply chain companies serving the mobile phone industry are also in a highly cyclical market environment, affected by both macroeconomic factors and inventory cycles within the supply chain.
These companies also operate in a highly competitive environment, where product innovation and research and development (R&D) investment are key to success.
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