Morgan Stanley: MediaTek lands second AI chip customer: Can TPU growth offset weakness in traditional businesses?

What additional growth will the second AI chip customer bring?

MediaTek management confirmed it had won a second custom AI chip customer. The company said the customer is not a Chinese cloud service provider; Morgan Stanley speculates that it may be a US cloud service provider.
In its model, Morgan Stanley expects this customer to contribute 2.5 billion US dollars in revenue in 2028; management believes demand could be higher.
Based on project progress and the new customer win, Morgan Stanley maintained its Overweight rating, top-pick view and 6,188 New Taiwan dollar price target for MediaTek.

Morgan Stanley expects TPU v8 to contribute 2.5 billion US dollars in revenue in the fourth quarter of 2026, above previous guidance of more than 2 billion US dollars.
The next-generation TPU v9 is expected to complete chip design finalization on schedule and enter mass production in the first quarter of 2028. However, shipments are highly dependent on the supply of Intel EMIB-T substrates; management is confident that substrate yields will improve.
On whether custom chips can remain competitive if cloud service providers cut capital spending, management believes TPU v8 and v9, whose designs it participated in, have competitive total costs of ownership. On that basis, Morgan Stanley believes AI chip revenue can reach its forecast if substrate supply is sufficient.

The company guides for fourth-quarter 2026 revenue to rise 25%–32% quarter on quarter to approximately 210.1 billion to 221.8 billion New Taiwan dollars. Morgan Stanley calculates that, excluding 2.5 billion US dollars in AI chip revenue for the quarter, non-AI businesses would decline 17% quarter on quarter.
The company's fourth-quarter gross margin guidance range is 43.5%–46.5%; Morgan Stanley noted that price increases for some smartphone and smart edge products made the guidance midpoint of 45% slightly better than its previous expectation of 44%–45%.
Morgan Stanley estimates that if AI chips account for 35% of fourth-quarter revenue and the company's overall operating margin rises from 16.1% in the third quarter to 19%, the implied operating margin of the AI chip business once it reaches scale could be 25%–30%.

MediaTek's third-quarter 2026 revenue was 168.058 billion New Taiwan dollars, up 10.4% quarter on quarter and above the market consensus of 163.476 billion New Taiwan dollars; earnings per share were 17.50 New Taiwan dollars, also above the consensus of 16.15 New Taiwan dollars.
Profitability, however, weakened from a year earlier: third-quarter gross margin was 46.3%, down 2.81 percentage points year on year; operating margin was 16.1%, down 3.41 percentage points year on year.