TSMC Just Told Wall Street: You're Still Underestimating AI

Global foundry leader $Taiwan Semiconductor Manufacturing(TSM)$   released its Q4 2025 earnings, and the company, playing the role of the ultimate "shovel seller" in the AI gold rush, delivered a quarter that beat expectations across revenue, gross margin, and net profit, alongside long-term growth guidance that exceeded market forecasts.

Three Things to Watch

2026 Full-Year and Long-Term AI Guidance Blew Past Expectations; AI Remains the Growth Pillar

The Street had consensus expectations for TSMC's 2026 full-year USD revenue growth at approximately 25% YoY. Management's guidance? 30% YoY growth.

Last quarter, $Taiwan Semiconductor (TSM.US)$ management indicated that 2024-2029 AI revenue (GPU + ASIC + HBM controller) would exceed the previously guided CAGR of "mid-40%." This quarter, that guidance was raised to "mid-to-high 50s%." Management noted that AI revenue already accounts for "high-teens%" of total revenue in 2025, citing continued adoption of AI models driving increasing computational demand and, consequently, demand for advanced process nodes. TSMC also raised its 2024-2029 overall revenue CAGR from 15%-20% to 25%, and its gross margin target from 53% to 56%.

Notably, even with these substantial upward revisions, CEO C.C. Wei emphasized that management guidance has historically been conservative, implying further upside remains possible.

The Most Disciplined Foundry Just Announced a Major Capex Increase for 2026, Boosting Semiconductor Equipment Sentiment

Semiconductor equipment stocks $ASML Holding NV(ASML)$   / $Applied Materials(AMAT)$   / $Lam Research(LRCX)$   have recently outperformed the broader chip sector, partly on expectations of a recovery in memory fab spending, but also on bets that $Taiwan Semiconductor (TSM.US)$ would raise its 2026 capex.

The Street had consensus 2026 capex estimates at approximately $45.4 billion. TSMC's guidance came in at $52-56 billion, representing 27%-37% YoY growth. Equipment stocks rallied on the news. Management emphasized that capex over the next three years will be significantly higher than the $101 billion spent over the prior three years. 

Given semiconductors' inherent cyclicality, TSMC has historically been extremely cautious about capacity expansion, committing only when it sees long-term, sustainable demand. Recent market concerns about AI chip oversupply? Consider them effectively addressed.

Q1 2026 Guidance Dispelled Seasonal Slowdown Fears

Most Wall Street analysts had expected TSMC revenue to decelerate in Q1 2026 due to typical consumer electronics seasonality. Management's guidance once again defied those concerns.

$Taiwan Semiconductor (TSM.US)$ guided Q1 2026 USD revenue of $34.6-35.8 billion, representing 36%-40% YoY growth, an acceleration from Q4. Gross margin guidance came in at 63%-65%, with N3 gross margin expected to exceed the corporate average in 2026. Operating margin guidance of 54%-56% implies net margin could approach the 50% threshold, an exceptional achievement for a capital-intensive foundry business.

Key Financial Highlights

– Q4 Revenue (USD): $33.73 billion, +25% YoY, +2% QoQ, beating consensus of $32.38 billion and the prior guidance range of $32.2-33.4 billion. In NTD terms, Q4 revenue was NT$1,046 billion, +20% YoY, +6% QoQ.

– Q4 Gross Margin: 62.3%, +3.3 ppts YoY, +2.8 ppts QoQ, above consensus of 60.4% and prior guidance of 59%-61%.

– Q4 Operating Margin: 54.0%, +5.5 ppts YoY, +3.4 ppts QoQ, above consensus of 50.7% and prior guidance of 49%-51%.

– Q4 Net Income (USD): $16.3 billion, +41% YoY, +8% QoQ, beating consensus of $14.58 billion.

Q4 Revenue Breakdown by Platform

– HPC (primarily $NVIDIA (NVDA.US)$ / $Broadcom (AVGO.US)$ / $Advanced Micro Devices (AMD.US)$ / $Intel (INTC.US)$ AI and PC chips) generated approximately NT$581 billion in revenue, up 26% YoY and 5% QoQ, accounting for 55% of total revenue.

– Smartphone (primarily mobile chips) brought in approximately NT$329 billion, up 10% YoY and 11% QoQ on seasonal strength from new $Apple (AAPL.US)$ iPhone launches, representing 32% of total revenue.

– IoT contributed approximately NT$55 billion, up 29% YoY and 3% QoQ, accounting for 5% of total revenue.

– Automotive generated approximately NT$50 billion, up 33% YoY but down 1% QoQ, representing 5% of total revenue.

Technology mix: 3nm accounted for 28% of wafer revenue, 5nm for 35%, and 7nm for 14%. Advanced nodes (7nm and below) reached a record 77% of total revenue.

Summary

As the gatekeeper of AI chip production capacity, TSMC's every move reverberates across global AI-themed investments. The long-term AI demand guidance released in this earnings call is nothing short of a shot of adrenaline for AI investors.

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