Today, I will be doing a review for TSMC TSM 0.00%↑.
This is what I will be covering in the article:
Strong 2Q26 and outlook
Pricing discipline
Accelerating advanced node capacity expansion
Node development for the A14 node family
Long-term order visibility
Valuation
Conclusion
In 2Q26, TSMC delivered revenue of $40.2 billion, which was up 34% from the prior year and 12% sequentially, while also guiding to yet another 12% sequential growth next quarter.
Gross margin and operating profit margin came in at 67.7% and 60.3%, ahead of expectations of 67.3% and 58.7%.
Earnings per share came in at NT$27.25 per share, ahead of expectations of NT$24.33.
TSMC guided 3Q26 revenue to be between $44.5 billion to $45.8 billion.
At the midpoint, this implies 12% sequential growth.
Gross profit margin is expected to be between 65% and 67% while operating profit margin is expected to be between 56% and 58%.
For the full year 2026 revenue guidance, TSMC raised guidance from the earlier “more than 30% growth” in 2026 to “more than 40% growth” in 2026.
Due to rising AI demand across AI accelerator, networking and CPU along with inflationary costs, TSMC also raised its 2026 capital expenditure guidance from the earlier range of $52 billion to $56 billion to the new range of $60 billion to $64 billion.
This is a 15% increase in 2026 capital expenditure guidance.
For the new range of capital expenditures, management expects 70% to 80% to be invested in the advanced process, 10% in specialty, 10% to 20% in advanced packaging testing and masks.
In terms of US investment, TSMC is adding another $100 billion investment for its US Arizona expansion, with the total investment now reaching $265 billion.
Despite the aggressive increase in capital expenditures for 2026, management acknowledged that supply will likely remain tight for years.
Management highlighted that AI-related demand spans CPUs, GPUs and XPUs, requiring continuous balancing of wafer allocation across customers.
Rather than being motivated competitively, TSMC reiterated their stance that their expansion of leading-edge capacity is entirely demand driven.
TSMC starts customer engagements several years before production, which makes the foundry business fundamentally different from commodity manufacturing.
Through these engagements and extensive collaboration with customers, along with TSMC’s own judgement, TSMC’s capacity planning is based on visibility and conservatism in my view.
Specifically for the lift in capital expenditures in 2026, management suggested that as AI demand broadens beyond GPUs to include CPUs, custom ASICs and networking silicon, this has further reinforced management’s confidence in 2026 revenue growth of more than 40% from the prior year.
Perhaps more importantly, management mentioned that it does not just rely on cloud service provider forecasts, but it also evaluates their deployment schedules, power availability and data construction before TSMC decides to expand capacity.
As such, TSMC’s method of expanding capacity is based on real AI demand and real deployment and less likely to result in inventory building.
TSMC guided for 2H26 gross margin to be supported by continued productivity improvement, UTR enhancement and optimizing capacity allocation.
Overseas fabs expansion will have an impact of 2 to 3 percentage points to gross margin in the early stage and 3 to 4 percentage points in the later stage.
Ramping of N2 in 2H26 will also have about 3 to 4 percentage points gross margin impact in 2H26.
Management continues to have an optimistic long-term outlook, with 5-year AI sales CAGR between 2024 to 2029 remaining at high-50%.
Management continuously reiterated that AI demand has become even stronger than previously expected.
In my view, TSMC is playing the long game here with its pricing discipline.
While we see headlines of memory or storage prices increasing exponentially, TSMC has kept its discipline on pricing discipline despite being a monopoly in the leading-edge nodes.
Despite the fact that overseas fabs and N2 ramp will dilute gross margin as mentioned earlier, TSMC is using stronger advanced node utilization and manufacturing efficiencies to offset these gross margin headwinds rather than just leveraging on higher price increases.
With gross margin in 2Q26 reaching 67.7%, advanced technologies account for 77% of wafer revenue and 2nm contributes revenue for the first time.
TSMC is thus well positioned in the leading-edge to sustain best-in-class profitability within foundry peers while supporting the investments needed for AI growth.
TSMC has not and will not maximize short-term pricing at the expense of customer relationships, management has reiterated this many times.
As such, TSMC’s best-in-class and gross margin could technically be much better with price hikes given its strong leadership in the leading node, but its ability to offset gross margin headwinds through efficiency improvements and utilization is highly commendable in my view.
In my view, TSMC’s excellent disciplined philosophy is what differentiates it, especially when it is operating in one of the strongest demand environments for the industry, highlighting that the company does not operate in a way that maximizes short-term gains and margins.
By earning a sufficient return to continuously reinvest in its technology leadership and capacity expansion while ensuring that its customers continue to remain competitive is a smart long-term strategy as it is playing to the natural pricing power expansion that comes with increases in advanced node complexity and its technology leadership.
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