J.P. Morgan: TSMT’s optical module business ramps up, but component shortages weigh on 2027 revenue outlook

Which businesses drove growth in the third quarter?

TSMT reported third-quarter revenue of NT$14.458 billion, up 9% quarter on quarter and 13% year on year. Gross margin was 14.2%, up about 2.4 percentage points quarter on quarter. Overall performance met JPMorgan’s and market expectations.
The optical module surface-mount assembly business for a US customer launched on schedule and accounted for about 1% of total quarterly revenue. DRAM shipments rose about 30% quarter on quarter, but revenue grew only about 20%: the business is shifting partly to a consignment model, a change that raised the DRAM business’s gross margin by about 3 percentage points quarter on quarter.

JPMorgan expects optical module assembly shipments in the fourth quarter of 2026 to reach about 3 times the third-quarter level, and DRAM shipments to rise another 30% quarter on quarter. Driven by the two businesses, total quarterly revenue is forecast to rise 7% quarter on quarter and gross margin to improve by about 1 percentage point.
The company already has three optical transceiver module customers, but shortages of digital signal processors, copper-clad laminates and printed circuit boards have led the bank to lower its expectations for the optical module revenue contribution. It now expects the business to account for about 15% of full-year 2027 revenue and to grow quarter by quarter during the year.
Higher-specification products could partly offset the impact of shortages: the average selling price of 1.6T products is about 30% higher than that of 800G products, and JPMorgan expects them to account for 50% or more of the company’s optical module shipments in the second half of 2027.

Besides its existing US and Chinese memory customers, JPMorgan believes TSMT has secured some orders from two additional Chinese memory customers. The bank estimates that the potential increment from the new customers is still below 5%, but believes this shows that supply chain tightness is accelerating the outsourcing of memory assembly.
The bank expects memory and optical module assembly each to account for about 15% of full-year 2027 revenue, and AI server assembly for 5%–10%. By the end of 2027, optical module and AI server assembly are expected to account for more than 30% of revenue combined.

JPMorgan expects 2027 revenue to rise 30.3% year on year to NT$72.505 billion, and adjusted earnings per share to increase to NT$24.58, up 103.8% from the 2026 estimate and about 21% above market consensus.
Although the bank’s operating profit forecasts for 2026 and 2027 are close to its previous estimates, a higher share of earnings from the China business raised its tax rate assumption, resulting in cuts of 2% and 4% to its respective earnings-per-share forecasts for the two years. Its 2027 gross margin forecast was also lowered to 17.1% from 18.0%.
Investment and working capital requirements also affect cash flow: the bank expects capital expenditure of NT$5.1 billion in 2026, up from NT$3.086 billion in 2025. Free cash flow to the firm is expected to fall from NT$2.151 billion in 2025 to negative NT$1.776 billion, before recovering to NT$719 million in 2027.
JPMorgan maintained its overweight rating and lowered its price target for June 2027 from NT$370 to NT$356, still valuing the stock at 14 times forecast 2027 earnings per share.