TSMC (TSM)
TL;DR
TSMC is the world’s largest dedicated semiconductor foundry — the sole high-volume manufacturer of leading-edge chips (5nm/3nm/2nm) for Apple, NVIDIA, AMD, and the entire AI ecosystem. Just reported Q2 FY2026: revenue NT$1,270B / US$40.2B (+36% YoY) with record 67.7% gross and 60.3% operating margins and EPS NT$27.25 (+77%) — a strong beat on leading-edge AI demand. Q3 FY2026 guided to US$44.6-45.8B with 65-67% gross and 56-58% operating margins, and full-year 2026 raised to “slightly above 40%” USD growth on a steep 2nm ramp. Stock at $408 with a 25x P/E(ttm), down from the $478 quarter-end high as capex peaks, still ~10x below US semi peers on Taiwan’s geopolitical discount.
Summary
| Finding | Assessment |
|---|---|
| 5-Year Stock Return | $112→$408. TTM OP +313% (NT$603B→NT$2,489B). P/E(ttm) compressed 35x→25x as earnings outpaced stock. |
| Business Model | World’s largest pure-play foundry. ~60% global share, ~90% leading-edge. HPC 66%, Smartphone 22%, IoT 5%. |
| Competitive Moat | WIDE 2-3yr process lead, pure-play trust model, 500+ customers, $52-56B capex barrier, ecosystem lock-in via PDKs. |
| Past 5-YR Drivers | AI/HPC mix shift (35%→66% of rev), CoWoS packaging >10% of rev, 3nm ASPs ~70% above 7nm. |
| Recent Stock Move | $226→$408 (vs Jun 2025). Q2 record beat ($40.2B rev, +36%), record 60.3% OM on leading-edge AI demand. ADR closed Q2 at $478, then eased to $408. |
| Revenue Trend | ACCELERATING Rev YoY: 36% (Q2 2026) → 46% (Q3 2026E). |
| Margin Trend | FLAT OM%: 60.3% (Q2 2026) → 60.3% (Q3 2026E). |
| TTM OP Trajectory | ACCELERATING TTM OP QoQ: 14% (Q2 2026) → 15% (Q3 2026E). TTM OP NT$2,489,485M. |
| Key Opportunities | Leading-edge AI demand: HPC 66% of rev (+20% QoQ). 2nm ramp begun (3% of wafer). FY2026 raised to “slightly above 40%” USD growth. A14 (2028), A13 debuted. |
| Key Risks | Taiwan ~80%+ capacity concentration; Apple ~25% of rev. Overseas fab margin dilution. FCF/OP 46% on US$26.8B H1 capex. China now 6% of sales. Valuation. |
| Catalysts | Q3 guided US$44.6-45.8B (+46% YoY). N2 ramp milestones. FY2026 “slightly above 40%”. N3/2nm fabs Taiwan + Arizona (2027). |
| P/E(ttm) Valuation | 25x for a 36%+ grower with 60% OM and a leading-edge monopoly. Upside 30-33x; downside 18-20x on geopolitical shock. |
Q2 FY2026 Key Data (Apr-Jun 2026), reported 2026.07.16
- Revenue NT$1,270B / US$40.2B (+36% YoY, +12% QoQ). Net income NT$707B (+77% YoY); EPS NT$27.25 (US$4.31 per ADR).
- Record margins: gross 67.7%, operating 60.3%, net 55.6%. HPC 66% of revenue (+20% QoQ); 7nm & below = 77% of wafer sales.
- Q3 2026 guided US$44.6-45.8B with gross margin 65-67%, operating margin 56-58%; FY2026 raised to “slightly above 40%” USD growth.
Key Takeaways from Earnings Call
- Record quarter, but 2H margin headwinds flagged. Q2 revenue rose 12% QoQ to NT$1,270B and gross margin climbed 1.5pp to a record 67.7% on cost improvement and higher utilization, partly offset by overseas-fab dilution. Huang guided Q3 GM down 1.7pp to 66% midpoint and warned the steep N2 (2nm) ramp will dilute gross margin ~3-4pp across 2H; separately, overseas-fab dilution runs 2-3% in early stages and widens to 3-4% later.
- CapEx raised, with a bigger multi-year trajectory. The 2026 budget was lifted to US$60-64B (from $52-56B in January), driven by demand plus tool-price inflation; Huang said CapEx over the next three years will be “even more significantly higher” than the prior three. TSMC also announced an additional US$100B Arizona investment (~4 more front- and back-end fabs, ~$265B total there), alongside 13 new fabs underway in Taiwan.
- AI outlook “stronger and stronger,” full year raised. Management lifted full-year 2026 growth to “slightly above 40%” in USD. Asked to update the five-year AI-accelerator CAGR (prior mid-to-high-50%), Wei declined a number but said it is “stronger than what we said before.” He framed agentic AI as reviving CPU demand on top of accelerators — x86, Arm and RISC-V designs are “almost all” TSMC customers, adding incremental leading-edge silicon.
- Supply gap “very big”; disciplined value-pricing. Wei called the leading-edge demand-supply gap “very big” and sees robust demand through ~2029-2030, with packaging so tight it is “limiting customers’ growth.” On pricing he ruled out 4x-5x hikes — “jealous” of memory’s 86% margins yet content near 68% — selling on value. A14 is on track (vs N2: +10-15% speed, 25-30% less power, ~20% density), volume in 2028, with A13/A12 derivatives following.
Key Segments and Revenue Mix (Q2 FY2026)
| Platform | Q1 2026 Share | QoQ Change | Key Details |
|---|---|---|---|
| HPC (High Performance Computing) | 66% | +20% | AI accelerators (NVIDIA, AMD, Broadcom), CPU, GPU, FPGA; AI demand the primary growth engine |
| Smartphone | 22% | -4% | Apple A/M-series, Qualcomm, MediaTek; seasonal softness ahead of 2H flagship builds |
| IoT | 5% | +4% | Connected devices, smart home, wearables; steady recovery |
| Automotive | 4% | +15% | ADAS, EV power management; strong sequential rebound |
| DCE & Others | 3% | +5% | Digital consumer electronics and others; small, growing |
Technology mix (Q2 2026): 2nm 3%, 3nm 30%, 5nm 33%, 7nm 11% of wafer revenue. Advanced technologies (7nm and below) = 74%. FY2025 revenue: NT$3,809B ($121B), +31.6% YoY. GM: 59.9%, OM: 50.8%. 15M 12-inch equiv wafers shipped.
Business Model
SUPPLIERS
ASML (EUV lithography, sole source)
Applied Materials, Lam Research (etch, deposition)
Shin-Etsu, SUMCO (silicon wafers)
Specialty chemicals & gases
Equipment /
Materials
→
TSMC
Pure-play foundry (no competing designs)
Leading-edge nodes: 3nm, 2nm in ramp
Advanced packaging (CoWoS, InFO)
Global fabs: Taiwan, Arizona, Japan, Germany
$52-56B CapEx FY2026
Wafers /
Packaging
→
$ Revenue
CUSTOMERS
Apple (~25% of revenue)
NVIDIA (AI GPUs, largest HPC customer)
AMD, Broadcom, Qualcomm
MediaTek, Marvell, Intel
500+ fabless/IDM customers
Moat Assessment: WIDE
- Unmatched manufacturing technology leadership: TSMC leads Samsung by 1-2 years and Intel by 2-3 years. Its 3nm is ~30% of wafer revenue and 2nm is now ramping. No rival matches its yield, performance and cost — an effective leading-edge monopoly.
- Pure-play model creates irreplaceable customer trust: Unlike Samsung and Intel, TSMC has no competing chip designs. That neutrality lets Apple, NVIDIA, AMD and Qualcomm all trust it simultaneously; switching foundries takes 12-18 months and billions.
- Scale economics and ecosystem lock-in: With ~60% global share and ~90% of leading-edge production, TSMC funds R&D no rival can match at equal margins. The EDA/IP/design ecosystem is optimized for its PDKs — a network effect that compounds its lead.
Stock vs. Earnings — 5-Year Performance
- Stock currently at $408, vs. $112 (5 years ago). TSMC nearly quadrupled as the indispensable enabler of AI compute. It eased from the $478 Q2 2026 quarter-end high as the market digested record capex.
- TTM Operating Profit grew from NT$603B to NT$2,489,485M. Advanced-node pricing power and the HPC/AI mix (66% of Q2 2026 revenue) lifted operating margin to a record 60.3%, with TTM OP reaccelerating +14% QoQ.
- P/E(ttm) range of 11x–35x reflects geopolitical and cycle swings. It peaked at 35x in the 2021 super-cycle and bottomed at 11x in 2022. Current 25x sits near the 5-year median — a persistent Taiwan discount vs. 30-35x US peers.
Past 5-Year Key Drivers
- AI/HPC mix shift and advanced-node pricing power: HPC grew from ~35% to 66% of revenue as AI demand exploded. Each node transition (7nm→5nm→3nm) carries higher ASPs (3nm ~70% above 7nm), driving revenue from $48B (FY2020) to $122B (FY2025).
- CoWoS and advanced packaging as a growth engine: AI chips need TSMC’s CoWoS packaging for HBM integration; TSMC doubled CoWoS capacity in 2025. Advanced packaging grew to ~8% of 2025 revenue (~$10B) and is projected above 10% in 2026.
- Structural capex cycle funding the capacity moat: TSMC invested $30-36B/yr in 2022-2025, rising to $52-56B in 2026 to fund the 2nm ramp, overseas fabs and CoWoS. Only TSMC can afford the R&D and capex to stay at the leading edge.
Quarterly Key Metrics
| Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Q4 2025 | Q1 2026 | Q2 2026 | Q3 2026E | |
|---|---|---|---|---|---|---|---|---|---|---|
| Quarter End | Jun 2024 | Sep 2024 | Dec 2024 | Mar 2025 | Jun 2025 | Sep 2025 | Dec 2025 | Mar 2026 | Jun 2026 | Sep 2026 |
| Stock Price | $172 | $174 | $197 | $166 | $226 | $279 | $304 | $338 | $478 | $408 |
| Stock QoQ | +22% | +1% | +14% | -16% | +36% | +23% | +9% | +11% | +41% | -15% |
| Rev YoY | 40% | 39% | 39% | 42% | 39% | 30% | 20% | 35% | 36% | 46% |
| OM% | 43% | 47% | 49% | 49% | 50% | 51% | 54% | 58% | 60% | 60% |
| R40 (Rev YoY + OM%) | 83% | 86% | 88% | 90% | 88% | 81% | 74% | 93% | 96% | 106% |
| TTM OP ($M) | $1,023,844 | $1,156,545 | $1,322,053 | $1,480,116 | $1,656,984 | $1,796,903 | $1,934,421 | $2,186,306 | $2,489,485 | $2,861,216 |
| TTM OP QoQ | +9% | +13% | +14% | +12% | +12% | +8% | +8% | +13% | +14% | +15% |
| FCF/OP ttm | 70% | 71% | 66% | 61% | 57% | 50% | 52% | 48% | 46% | 46% |
| Debt/EBITDA | 0.6x | 0.6x | 0.5x | 0.6x | 0.4x | 0.4x | 0.4x | 0.4x | 0.3x | 0.3x |
| P/E ttm | 29x | 26x | 26x | 20x | 24x | 27x | 28x | 27x | 33x | 25x |
Recent Stock Performance & Drivers
- Stock currently at $408, vs. $174 (Sep 2024). The multi-year rally reflects sustained AI demand; Q2 2026 delivered records (US$40.2B revenue, 60.3% OM). The ADR closed Q2 at $478, then eased to $408 as the market weighed peak capex.
- P/E(ttm) at 25x after strong earnings growth outpaced the share price. TTM OP QoQ reaccelerated to +14% in Q2 2026 as operating margin hit a record 60.3%.
- FCF/OP at 46%, below the 60% threshold — driven by TSMC’s heavy capex (US$26.8B in H1 2026, US$15.7B in Q2 alone); Q2 free cash flow fell NT$61B QoQ to NT$287B.
Opportunities
- AI/HPC demand broadening, full-year raised to “slightly above 40%”: HPC hit 66% of revenue (+20% QoQ), and management lifted 2026 USD growth guidance from “above 30%” as leading-edge orders expand across the customer base.
- 2nm ramp is the next revenue engine: N2 booked its first 3% of wafer revenue and enters a “steep” ramp into H2 2026, extending the advanced-node pricing/mix tailwind that already lifted 7nm-and-below to 77% of sales.
- Roadmap and packaging extend the lead: TSMC debuted A13 at its April symposium (after A14 for 2028) and is expanding CoWoS advanced packaging plus overseas capacity to capture multi-year AI infrastructure buildout.
Challenges
- Overseas-fab margin dilution: Arizona, Japan and Germany ramps diluted Q2 gross margin (offset this quarter by cost gains and utilization), and the drag is set to widen as more overseas capacity comes online through 2026-2028.
- Record capex pressures free cash flow: Capex ran US$26.8B in H1 2026; FCF/OP fell to 46% and Q2 FCF dropped NT$61B QoQ, keeping the FCF/OP scorecard criterion failing despite record operating profit.
- Geopolitics and concentration: ~80%+ of capacity sits in Taiwan and Apple is ~25% of revenue; China fell to just 6% of sales amid export controls, and a NT$63B one-time VIS gain flattered Q2 net income.
Next 12 Months
- Q3 2026 guide of US$44.6-45.8B implies ~46% YoY growth at midpoint. Gross margin 65-67% and operating margin 56-58% (FX 32) point to continued strong profitability even as overseas ramps dilute mix.
- N2 production ramp is the key execution catalyst: The steep 2nm ramp into H2 2026 drives Q3 growth and sets 2027 revenue; yield and output cadence are the numbers to watch.
- Full-year 2026 “slightly above 40%” USD growth: The raised outlook implies a strong H2; macro/FX swings and any AI-demand digestion are the main swing factors.
Next 12-24 Months
- 2027 capacity buildout is the central debate: New 2nm and N3 fabs in Taiwan and Arizona add meaningful capacity; the market will judge whether AI demand absorbs it without pricing pressure.
- Long-term margin framework provides a floor: Management targets through-cycle gross margin 53%+ and ROE mid-20s%+; node depreciation roll-off and utilization support margins against overseas dilution.
- A14 (2028) and A13 extend the roadmap: Next-gen nanosheet nodes preserve the 2-3 year process lead over Samsung and Intel, underpinning the leading-edge monopoly that generates ~77% of revenue.
Core Metrics Scorecard
| Q4'21 | Q1'22 | Q2'22 | Q3'22 | Q4'22 | Q1'23 | Q2'23 | Q3'23 | Q4'23 | Q1'24 | Q2'24 | Q3'24 | Q4'24 | Q1'25 | Q2'25 | Q3'25 | Q4'25 | Q1'26 | Q2'26 | Q3'26E | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarter End | Dec21 | Mar22 | Jun22 | Sep22 | Dec22 | Mar23 | Jun23 | Sep23 | Dec23 | Mar24 | Jun24 | Sep24 | Dec24 | Mar25 | Jun25 | Sep25 | Dec25 | Mar26 | Jun26 | Sep26 |
| R40 > 40% | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ||
| R40 accelerate | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | |||||||
| TTM OP QoQ > 10% | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | |||||||||
| TTM OP QoQ accelerate | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | |||||||||||
| TTM FCF/OP > 60% | ❌ | ❌ | ❌ | ❌ | ❌ | ❌ | ❌ | ❌ | ❌ | ❌ | ✅ | ✅ | ✅ | ✅ | ❌ | ❌ | ❌ | ❌ | ❌ | ❌ |
| Debt/EBITDA < 3.5 | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ | ✅ |
| Total passes | 3 | 5 | 5 | 4 | 3 | 2 | 1 | 1 | 4 | 4 | 5 | 6 | 6 | 5 | 3 | 2 | 2 | 5 | 4 | 5 |
| Stock QoQ | +8% | -13% | -22% | -16% | +8% | +26% | +8% | -13% | +16% | +39% | +22% | +1% | +14% | -16% | +36% | +23% | +9% | +11% | +41% | -15% |
| P/E ttm | 31x | 25x | 17x | 12x | 11x | 14x | 16x | 15x | 19x | 26x | 29x | 26x | 26x | 20x | 24x | 27x | 28x | 27x | 33x | 25x |
- Stock strength aligns with 4-6 pass quarters, weakness with 2-3. Q3 2026E scores 5 of 6; Q2 2026 posted 4. The 2020-2021 AI up-leg ran at 5-6 passes, while the 2023 trough (1-2 passes) coincided with the deepest P/E compression.
- TTM OP QoQ >10% stayed active into Q2-Q3 2026 (+14%/+15%). Both the R40 (>40%) and Debt/EBITDA criteria pass every quarter shown; R40 hit a record 106% in Q3 2026E on the 60% operating margin.
- FCF/OP consistently fails (<60%) on the capex-heavy model, but Debt/EBITDA always passes. At 46% FCF/OP and 0.3x Debt/EBITDA, TSMC funds record capex from operating cash while keeping leverage minimal.
Chart: R40 vs Stock Price (Since 2020)
Chart: Scorecard Total Passes vs Stock Price (Since 2020)
Q1 FY2026 Key Data, reported 2026.04.16
- Revenue $25.8B (+35% YoY), beat guidance. EPS $2.12 (+54%).
- By platform: HPC 59% (+45% YoY, AI-driven), Smartphone 23% (+22%), IoT 8% (+24%), Auto 5% (-1%). N3/N5 = 57% of revenue.
- Q2 guided at $28.4-29.2B revenue (+37-40% YoY). GM 57-59%. Full year CapEx $38-42B.
Key Takeaways from Earnings Call
- AI demand remains very strong — customers pulling in orders for CoWoS advanced packaging. Capacity sold out through 2026. N2 on track for H2 2025 volume, already seeing strong engagement for N2P.
- Overseas fab strategy accelerating: Arizona Fab 21 producing A16 chips, Japan Kumamoto 2 ramping, Germany approved. TSMC maintaining technology leadership while diversifying geographically.
- Gross margin expanding on mix shift toward advanced nodes and CoWoS. Management confident in sustaining 57%+ GM through 2026 despite overseas fab dilution of 2-3% long-term.
Source: SEC EDGAR annual and quarterly filings, company earnings conference calls and presentations.
Disclaimer: This report is for educational purposes only. NO investment advice.