Taiwan Semiconductor earnings: Buoyant guidance backed by voracious AI demand
We’ve raised our fair value estimate of Taiwan Semiconductor stock.
Mentioned: Taiwan Semiconductor Manufacturing Co Ltd ADR (TSM)
Key Morningstar metrics for Taiwan Semiconductor Manufacturing
- Fair Value Estimate: $428.00
- Morningstar Rating: ★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
What we thought of Taiwan Semiconductor Manufacturing’s earnings
Taiwan Semiconductor Manufacturing TSM guided its 2026 revenue to grow by 30% and capital expenditure as high as $56 billion. Its December quarter revenue topped TWD 1 trillion ($33.7 billion), up 6% sequentially. Gross margin grew 287 basis points from the prior quarter to 62.3%.
Why it matters: The 2026 capex budget of $52 billion-$56 billion crushed our prior expectation of $47 billion. Management attributes this to exuberant artificial intelligence demand and backed this view with a 2024-29 revenue CAGR of mid-20s (previously 20%) and an AI revenue CAGR of over 50% (mid-40s).
- Management’s track record of conservative guidance, plus its thinly veiled reference to the benefits of an indirect customer firm (Meta Platforms), boost our confidence that Taiwan Semiconductor an incur TWD 8.8 trillion in sales by 2029, or 23.3% 2025-29 CAGR.
- We were previously wary of the ripple effects that OpenAI’s cash burn posed risks to Taiwan Semiconductor’s revenue targets. Now we have more visibility on AI spending since Google is increasing availability of tensor processing units and Broadcom is adding customers.
The bottom line: We increase our fair value estimate for Taiwan Semiconductor to TWD 2,700 from TWD 1,900 ($428 per ADR from $310) on higher expectations of durable AI spending. We believe the market is skeptical on how specialized chips can complement more versatile Nvidia chips.
- We are more bullish in China AI demand, as Nvidia has secured export licenses in the United States and Chinese AI firms thirst for the most power-efficient chips made on Taiwan Semiconductor processes.
- We lifted our 2026-29 revenue and EPS estimates. We believe Taiwan Semiconductor is the main beneficiary among all chipmakers, given its proven technological leadership and reliability.
Big picture: Taiwan Semiconductor’s increased capex is music to the ears of wafer fab equipment makers like Lam Research, ASML, and Tokyo Electron. We believe WFE firms are fit for hedging against competition from Intel Foundry and Taiwan-specific political risks.
