Nomura: UMC bets on AI-related products: average selling prices expected to rise in 2027, alongside expansion costs

How did third-quarter operations and fourth-quarter guidance measure up?

UMC reported third-quarter 2026 revenue of 74.239 billion New Taiwan dollars, up 8% quarter over quarter. Wafer shipments rose 7.3% quarter over quarter, and capacity utilization increased from 85% in the second quarter to 92%. The company said demand was healthy across its businesses, with some 12-inch fabs fully utilized and a clear recovery at its 8-inch fabs as well.
Third-quarter gross margin was 34%, below Nomura’s forecast of 35%; earnings per share were 1.32 New Taiwan dollars, in line with Nomura’s forecast. The company guided for fourth-quarter revenue of approximately 75.771 billion New Taiwan dollars, up 2.1% quarter over quarter, above Nomura’s forecast of 75.251 billion but below the Bloomberg market consensus of 77.586 billion.
For the fourth quarter, the company expects wafer shipments to rise 1% to 3% quarter over quarter, the average selling price in US dollars to remain stable, and gross margin to be similar to the third quarter.

With strong demand for some technologies and high fab utilization, UMC expects its blended average selling price to shift from its previous decline to a clear increase starting in the first quarter of 2027. The company expects the full-year blended average price in 2027 to rise 10% from 2026, reflecting both price increases for comparable products and a higher share of high-value products.
UMC is discussing annual prices with customers; contractual obligations and differences in technology and product mix make negotiations complex. Nomura considers the company’s expected 10% increase conservative and expects prices to rise broadly by more than 10% from the first quarter of 2027.
Improved average prices and utilization support profitability, but the company expects depreciation to grow by at least a low-single-digit percentage in 2027, while raw material costs will also rise. Management said depreciation from higher capital spending could pressure gross margins in 2027 to 2028, making it difficult to approach the previous cycle’s peak.

UMC said its AI-related revenue was approximately 300 million US dollars in 2026 and expects it to account for more than a quarter of total revenue by 2029. Nomura believes current revenue includes almost no contribution from silicon photonics or silicon capacitors; assuming total company revenue in 2029 is similar to 2026, AI-related revenue would exceed 2 billion US dollars.
AI infrastructure requires power management, connectivity and higher memory bandwidth. UMC’s related initiatives include silicon photonics, deep trench capacitors for power supply, and custom memory stacking. The company expects silicon photonics volumes to ramp up from 2027 and advanced packaging volumes from 2028, with gross margins for the related businesses above the company average.
The company said several major cloud service providers are qualifying its 1.6T optical transceiver platform; its substrate-embedded deep trench capacitor solution for AI and servers has completed tape-out and functional verification, and its custom memory stacking solution has passed initial customer validation.
AI business capacity is currently fully utilized and will remain constrained in 2027, with most new capacity coming online from the end of 2028. Expansion plans are tied to customer demand commitments, with planned capacity by 2030 of 18 thousand silicon photonics wafers per month, 22 thousand silicon capacitor wafers per month and 20 thousand thin-film lithium niobate wafers per month.

Nomura considers third-quarter results and fourth-quarter guidance broadly in line with its expectations and maintains its earnings forecasts, buy rating and target price of 176 New Taiwan dollars. The target is based on forecast average earnings per share of 8.8 New Taiwan dollars for 2027 to 2028, at a price-to-earnings multiple of 20 times. The multiple is toward the higher end of UMC’s historical range and reflects Nomura’s assessment of the resilience of its outlook.
The company continues to see solid demand in communications, automotive and industrial businesses, but PC-related demand has weakened. Slower end demand, weaker-than-expected demand for 28-nanometer technology or less improvement in product mix than expected could affect Nomura’s valuation assessment.