Morgan Stanley: MediaTek earnings preview: TPU drives revenue surge, while packaging substrates set the ceiling for growth

What will drive fourth-quarter growth after a third-quarter beat?

MediaTek’s preliminary third-quarter 2026 revenue was 168.1 billion New Taiwan dollars, above Morgan Stanley’s previous estimate of 154.6 billion New Taiwan dollars and the Visible Alpha market consensus of 162.2 billion New Taiwan dollars. The bank believes some handset demand was pulled forward from the fourth quarter into the third, with the company reflecting new pricing from September being one reason.
Morgan Stanley expects non-AI revenue to decline 10%–20% quarter on quarter in the fourth quarter amid weak consumer demand for products such as handsets and televisions. Mass production of TPU v8t is expected to generate 2 billion US dollars in revenue, driving total company revenue up 30%–40% quarter on quarter.

Morgan Stanley expects a higher share of custom AI chips to bring the company’s overall gross margin down to 44%–45% in the fourth quarter of 2026, compared with its third-quarter estimate of 46%.
The bank’s model assumes a gross margin of about 35% for the 2-nanometer TPU, below the approximately 40% for the 3-nanometer TPU. However, owing to value created by chip and packaging design, the operating margin for custom AI chips is still expected to be 20%–25%, above the 15%–20% for the handset business.
Revenue growth will also dilute the expense ratio: the model projects the company’s overall operating margin rising from 17.3% in 2026 to 27.2% in 2028, while its overall gross margin falls from 45.4% to 38.1% over the same period.

Morgan Stanley’s supply chain checks indicate that approximately 180 thousand wafers of CoWoS advanced packaging capacity could be allocated to TPU v8t, supporting production of approximately 3.6 million chips. Given an ABF substrate shortage, however, the bank still assumes MediaTek will recognize revenue corresponding to 3 million chips in 2027.
If substrate supply improves, the bank believes TSMC’s CoWoS capacity allocated to v8t could rise to 200 thousand–220 thousand wafers. In other words, whether increased packaging capacity translates into more shipments also depends on the supply of matching substrates.

Morgan Stanley expects Google TPU v9 to tape out in early 2027 and enter mass production in early 2028. The project currently uses Intel EMIB-T packaging; the bank’s checks indicate substrate output is on schedule, but 2028 production remains highly dependent on yield improvements.
TSMC’s CoWoS is a potential backup, but its cost structure is higher than EMIB’s. If a separate CoWoS version were developed for v9, Morgan Stanley estimates tape-out would take about a year. Its 2028 model includes 3 million v9 chips, corresponding to 39 billion US dollars in revenue.
A second cloud services customer is another growth assumption. The bank estimates revenue of 2.5 billion US dollars based on delivery of 100 thousand subsystems in 2028 at 25 thousand US dollars each; the price includes components such as HBM supplied on the customer’s behalf. The bank does not expect the company to announce a second customer at this earnings call.

Morgan Stanley maintains its overweight rating and top industry pick designation for MediaTek, with a price target of 6188 New Taiwan dollars. It believes pressure on the handset business and gross margin is reflected in the share price, while TPU growth potential is not yet fully reflected.
By the bank’s estimate, the price target represents 42 times 2027 earnings per share; its earnings assumptions for 2027 and 2028 are unchanged.