Taiwan Semiconductor Manufacturing Company Limited (TSM) | The Buildout — AI Infrastructure
The Verdict
TSMC is a dedicated semiconductor foundry: it manufactures wafers and advanced packaging for customers who bring their own chip designs. In the AI buildout it sits between chip designers and the data center, producing the leading-edge logic that AI accelerators, data-center CPUs, and networking chips all depend on. Because it also supplies the advanced packaging that ties those chips together, it is a chokepoint for AI compute silicon.
| Market Cap | — |
| Revenue (TTM) | $141.6B |
| Revenue Growth | +31.4% |
| EBITDA Margin (TTM) | 71.5% |
| Net Cash | $79.6B |
| Earnings Beats | 6 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- HPC — the main AI segment — was 66% of Q2 2026 revenue and grew 20% q/q.
- Advanced technology, defined as 7nm and below, reached 77% of Q2 wafer revenue, up from 74% in Q1, with 2nm contributing 3%.
- Management raised FY2026 revenue growth guidance from above 30% to 'slightly above 40%' in one quarter.
- 2026 capex was raised to $60–64B; management says the next three years will be 'even more significantly higher' than the past three.
- A14 tape-outs are 'ongoing and ahead of schedule,' with internal test vehicles near 90% device performance and near 90% 256Mb SRAM yield.
What We’re Watching
- Q3 2026 gross margin guidance of 65–67%, midpoint 66%, tests how much of the 3–4pp N2 ramp dilution can be offset.
- Smartphone revenue fell 4% q/q in Q2 and 11% q/q in Q1 on component-price pressure; watch whether consumer softness spreads.
- Arizona $100B expansion has no firm schedule; management says '~4 more fabs' but the front-end/packaging split is vague.
- Management declined a numeric AI accelerator CAGR, three-year capex figure, or demand gap; the multi-year trajectory remains qualitative.
The thesis is strengthening: AI demand pushed management to raise both full-year revenue growth and 2026 capex within a single quarter, and leading-edge plus packaging capacity is described as scarce. The open question is whether that demand holds through 2029–2030 without an interim dip while N2 and overseas fabs dilute margins.
Earnings Beat
Q2 2026 revenue was $39.9B with gross margin of 67.7%; HPC reached 66% of revenue, and advanced process nodes were 77% of wafer revenue.
| Metric | Q2 FY2026 | Q1 FY2026 | Q2 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $39.9B | $35.5B | $32.0B | +24.8% |
| Gross margin | 67.7% | 66.2% | 58.6% | +910bps |
| EBITDA | $30.3B | $25.8B | $28.3B | +7.1% |
| EPS | $4.28 | $3.46 | $2.63 | +62.7% |
| HPC platform share | 66% | 61% | n/a | — |
Our packaging capacity is so tight that now it’s limiting my customers’ growth.— C.C. Wei, July 16, 2026
Management tone: Management's tone moved from describing capacity as 'very tight' in April to explicit scarcity in July, with C.C. Wei saying 'the gap is very big.' At the same time, management declined to quantify the demand gap, AI accelerator CAGR, or three-year capex, and kept pricing language disciplined.
Management Guidance
For Q3 2026, management guided revenue to $44.6–45.8B, implying +12% q/q and +37% y/y at the midpoint, with gross margin at 65–67% and operating margin at 56–58%. FY2026 revenue growth was raised to slightly above 40%, 2026 capex to $60–64B, and the tax rate was held at 17–18%. The Q3 outlook assumes an exchange rate of $1 to TWD 32; N2 is expected to dilute gross margin by 3–4pp in H2 2026.
Trajectory
Revenue has stepped up sequentially: Q2 2026 was $39.9B, up 12.4% q/q, compared with a 5.4% q/q increase in Q1. Gross margin expanded to 67.7% from 66.2% as utilization and cost improvement offset overseas dilution. The mix shifted further to HPC at 66% of revenue and advanced nodes at 77% of wafer revenue. The next move is down: Q3 gross margin is guided to 65–67%, as the steep 2nm ramp dilutes margin.
The Model
The model projects FY+1 revenue of $174.1B and EBITDA of $127.8B, a 73.4% EBITDA margin, anchored by the raised FY2026 guidance and capacity build. FY+2 projects revenue of $231.0B and EBITDA of $166.8B, a 72.2% margin, driven by continued AI demand and the multi-year capacity expansion.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $123.5B | $174.0B | $224.5B |
| YoY Growth | — | +40.9% | +29.0% |
| EBITDA | $90.7B | $128.4B | $163.0B |
| EBITDA Margin | 73.4% | 73.8% | 72.6% |
Projections are the median of 5 independent model runs. The model’s revenue sits 5.9% above analyst consensus.
For Q3 2026, management guided revenue to $44.6–45.8B, implying +12% q/q and +37% y/y at the midpoint, with gross margin at 65–67% and operating margin at 56–58%. FY2026 revenue growth was raised to slightly above 40%, 2026 capex to $60–64B, and the tax rate was held at 17–18%. The Q3 outlook assumes an exchange rate of $1 to TWD 32; N2 is expected to dilute gross margin by 3–4pp in H2 2026.
What Could Go Right — and Wrong
- AI demand stays strong through 2029–2030, absorbing the 2026 $60–64B capex and larger following years.
- Agentic AI drives a data-center CPU replacement cycle across x86, Arm, and RISC-V, expanding TSMC demand beyond accelerators.
- A14/A13/A12 ramp on schedule, with A14 volume production in 2028 and derivatives in 2029, extending the technology lead.
- Advanced packaging — CoWoS, SoIC, CoPoS, COUPE — grows into a durable value pool and stops limiting customer growth.
- New AI players broaden the customer base, reducing dependence on the top two customers at 36% of FY2025 revenue.
- AI demand digests or pauses before 2029–2030, leaving record new capacity underutilized.
- N2 dilution of 3–4pp in H2 2026 combines with overseas fab dilution of 2–3% early and 3–4% later to compress margins more than expected.
- Top two customers, 36% of FY2025 revenue, shift share.
- Intel's 18A/14A or Samsung's foundry push gains credibility at leading-edge, with Intel EMIB-T ramping for 2027.
- Consumer weakness from memory/component inflation persists; smartphone fell 11% q/q in Q1 and 4% q/q in Q2.
Looking Ahead
Over the next 12 months, TSMC's path runs through Q3 2026 results and the N2 ramp, N2P volume production in the second half of 2026, the N3 margin crossover expected in H2 2026, and the first new 3nm fabs: Tainan in 1H 2027 and Arizona Fab 2 in 2H 2027. In parallel, A14 moves toward pre-production in 2027.
- Q3 2026Q3 2026 results — Tests Q3 revenue guide $44.6–45.8B and gross margin 65–67%.
- 2H 2026N2P volume production — Reaffirmed N2P high-volume manufacturing in 2H 2026.
- H2 2026N3 margin crossover — N3 gross margin expected to reach corporate average.
- 1H 2027Tainan 3nm fab production — New Taiwan 3nm fab starts volume production.
- 2H 2027Arizona Fab 2 production — US 3nm Fab 2 starts volume production.
- 2027A14 pre-production — A14 moves toward volume production in 2028.
Financials
Annual Summary
| Metric | FY2024 | FY2025 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $89.8B | $123.5B | $141.6B | +37.5% |
| Gross Margin | 55.8% | 59.8% | 64.2% | +402bps |
| EBITDA | $61.6B | $90.7B | $420.5B | +47.2% |
| EBITDA Margin | 68.6% | 73.4% | 71.5% | +485bps |
| Net Income | $36.0B | $55.7B | $71.3B | +54.9% |
| Free Cash Flow | $27.0B | $32.6B | $142.9B | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)64.2%
- EBITDA Margin (TTM)71.5%
- Net Margin (TTM)50.3%
- ROIC51.2%
- FCF Conversion37.3%
- SBC / Revenue0.0%
The Company
TSMC is a dedicated semiconductor foundry: it manufactures wafers for customers from their proprietary chip designs rather than selling chips under its own brand. Its process portfolio spans CMOS logic, mixed-signal, radio frequency, embedded memory, and BiCMOS, plus 3DFabric advanced packaging and testing services. In the AI buildout, it fabricates the leading-edge logic that GPUs, AI ASICs, XPUs, data-center CPUs, and networking chips rely on, and it packages many of those chips with CoWoS, SoIC, and CoPoS.
TSMC runs an integrated global fab network rather than a fabless model. The 20-F lists headquarters and nine fabs in Hsinchu, two fabs in Central Taiwan, seven in Southern Taiwan, two in the United States, one each in Shanghai and Nanjing, and one in Japan before the later Arizona, Taiwan, Japan, and Germany expansions. In 2025 it shipped 15,022 thousand 12-inch equivalent wafers, deployed 305 process technologies, and served 534 customers.
Business Segments
Competitive Landscape
The source material frames TSMC's competitive position around technology, manufacturing, and customer trust. On the July 2026 call, management acknowledged competitor profitability and US government support but pointed to those three fundamentals as durable moats.
- SamsungCompetitor; C.C. Wei acknowledged competitor profitability and US government support, then pointed to technology, manufacturing, and trust as durable moats. No specific Samsung node detail is provided.
- Competitor; C.C. Wei acknowledged competitor profitability and US government support, then pointed to technology, manufacturing, and trust as durable moats.
- GlobalFoundriesAppears in Wiring as a mature/specialty competitor; no latest-call detail in the source set.
- UMCAppears in Wiring as a mature/specialty competitor; no latest-call detail in the source set.
- SMICAppears in Wiring as a mature/specialty competitor; no latest-call detail in the source set.
Supply Chain
TSMC sits at the center of AI silicon supply: it sources wafers, tools, gases, and utilities from a global supplier base and sells wafers and advanced packaging to chip designers and hyperscaler-backed programs. Wiring records 138 relationships, including 74 suppliers and 50 customers.
More on TSM: Earnings recap