TSMC 3Q26: above its own guidance again, and still short of capacity

The quarter in brief

TSMC reported third-quarter 2026 results on October 15. Consolidated revenue was NT$1,494.24 billion, net income NT$763.06 billion, and diluted EPS NT$29.43, or US$4.60 per ADR unit^Release. Year over year, revenue rose 50.9% and net income and EPS 68.7%^Release. In U.S. dollars, revenue was $46.72 billion, up 41.2% from a year earlier and 16.2% from the second quarter^6-K, which was above the high end of the company's third-quarter guidance^Call.

Profitability stayed exceptional. Gross margin was 66.4%, operating margin 58.7% and net profit margin 51.1%^6-K. That was ahead of the LSEG SmartEstimate for net income of NT$746.34 billion^CNBC.

The mix keeps moving toward the leading edge and toward AI. 2-nanometer shipments were 8% of wafer revenue, 3-nanometer 33%, 5-nanometer 28% and 7-nanometer 10%; 7-nanometer and below was 79%^Release. High-performance computing was 68% of net revenue and smartphones 21%^{p. 2}, and HPC revenue grew 22% from the prior quarter^{p. 2}.

Cash generation funds the build-out. Free cash flow rose to NT$476.56 billion in the quarter^{p. 5}, and net cash reserves reached NT$2,985.40 billion^{p. 4}. Capital expenditures were US$13.84 billion in the quarter^{p. 5}.

What changed in the thesis

The full-year outlook went up again. TSMC now expects 2026 revenue growth of around 44% in U.S. dollars^Call, up from slightly above 40%^{2Q26 call} in July. The fourth-quarter guide is revenue of US$52.3 billion to US$54.3 billion^Guidance, which represents a 14% sequential increase, or 58% year over year, at the midpoint^Call.

Demand still exceeds supply. Asked about the AI accelerator outlook, which TSMC had guided to grow at a mid- to high-50s percentage CAGR from 2024 to 2029^Call, C.C. Wei said demand is "very extremely robust", with no sign of slowdown, and that the growth rate "probably will be higher"^Call. He also said that, on TSMC's own assessment, demand is still higher than supply^Call. There is no new number, but the direction is clear. On supply, TSMC expects its N2 family's annual capacity to more than double in 2027^Call.

Margins are drifting lower, as planned. Gross margin fell 1.3 points from the second quarter, mainly because of dilution from the initial N2 ramp^{p. 2}. The fourth-quarter gross margin guide is 66% at the midpoint, down another 40 basis points, on the steep N2 ramp and overseas fabs^Call. The good news is the overseas cost: TSMC now expects the 2026 dilution from overseas fabs to be closer to 2%^Call, though it expects that dilution to widen to 3% to 4% in the next few years as more U.S. fabs ramp^Call.

Capex stays heavy. The 2026 capital budget is reiterated at US$60 billion to US$64 billion^Call, and capex for 2026 to 2028 is expected to be significantly higher than the past three years^Call. The CFO's framing is the one to hold them to: if TSMC does its job right, revenue growth will outpace capex growth^Call.

Bull and bear

The bear case is not hypothetical. Management itself said consumer and price-sensitive segments are being challenged by rising component prices and economic uncertainty, and that it is being prudent in planning for 2027^Call. The CFO also acknowledged that tool price inflation "is real"^Call. And customers based in North America accounted for 79% of revenue^{p. 2}, a heavy concentration in one region.

Valuation

Analysts' average 2027 EPS estimate, as compiled by Yahoo Finance, is US$23.39 per ADR, from 13 analysts, with estimates ranging from US$21.45 to US$25.87^{Earnings Estimate}. At 19x to 21x, that is about US$444 to US$491 per ADR.

A second aggregator lands in the same place. S&P Global Market Intelligence's consensus, published by Stock Analysis, is NT$148.61 per common share for next year, 2027^{EPS Next Year}. With each ADR representing five common shares^{p. 84} and at TSMC's planning rate of NT$31.8 to the U.S. dollar^Guidance, that converts to about US$23.37 per ADR (our conversion). Not every service is as high: Finviz shows next-year EPS of US$22.96^{Snapshot table}, which at 20x would give about US$459.

We use 20x because the business is guiding to around 44% revenue growth this year^Call with a 58% year-over-year increase at the fourth-quarter midpoint^Call, keeps an annualized return on equity of 45.5%^{Slide 3} and holds a large net cash position. That multiple is not demanding for this growth. We don't go higher because margins are guided down and capex for 2026 to 2028 is set to be significantly higher than in the past three years^Call.

The ranges below are our own: each multiple is applied to the Yahoo Finance 2027 estimates above (19x to 21x and 21x to 22x on the US$23.39 average; 15x on the US$21.45 low estimate up to the average).

The call

Bullish on TSM over 12 months, no price target, moderate conviction. TSMC beat its own guidance, raised its growth outlook, and says it still can't meet demand. Its net cash position supports a heavy capex programme. We hold conviction at three of five because margins are trending lower, capital intensity is rising and the company is cautious on 2027 consumer demand.

This is the author's opinion, not investment advice. Figures are from TSMC's 3Q26 press release, management report, presentation and call, its 2Q26 call and its 2024 annual report; consensus figures are from LSEG via CNBC, Yahoo Finance, S&P Global Market Intelligence via Stock Analysis, and Finviz; the valuation is our own.