Wall Street reviews TSMC’s financial report: Capital expenditure and profit margin guidance are too “explosive”; anyone hoping for a pullback will be disappointed.

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Facing TSMC’s significantly better-than-expected earnings report, Goldman Sachs analyst Sean Johnstone frankly stated: "Anyone expecting a pullback will be disappointed."

TSMC’s latest financial results showcased an impressive performance that drew market attention: the Q4 gross margin surpassed 60% for the first time, and net profit reached $16 billion, exceeding analysts’ expectations. More crucially, the company sharply raised its 2026 capital expenditure guidance to $52-56 billion, nearly 40% higher than previous forecasts, clearly signaling its commitment to the AI chip sector.

Senior Vice President and Chief Financial Officer Wendell Huang emphasized that the business growth is mainly driven by strong demand for advanced process technology, and this momentum is expected to continue into the new year.

Sean Johnstone's assertion reflects the general consensus on Wall Street: thanks to its technological leadership and capital moat, TSMC will continue to dominate the global AI chip manufacturing landscape. This performance and guidance, dubbed “explosive” by the market, not only demonstrates the company’s confidence in the long-term growth in AI demand, but also further cements its indispensable core position in the global semiconductor supply chain.

Capital Expenditures Far Exceed Expectations

TSMC raised its 2026 capital expenditure guidance sharply to $52-56 billion, which not only exceeds the general sell-side analyst expectation of $45-46 billion, but is also higher than buy-side institutions’ expectations of $47-52 billion. According to a J.P. Morgan report, the company further indicated that capital investment over the next three years will be "significantly higher," thereby lowering expectations of a near-term cut in spending.

According to Bank of America Merrill Lynch, TSMC raised its compound annual growth rate (CAGR) guidance for revenue from 2024 to 2029 from 20% to 25%, and lifted its AI accelerator revenue CAGR expectations from “mid-40%” to “upper-50%.” The company expects its total 2026 revenue to see almost 30% year-on-year growth, beating the market’s previously anticipated mid-20% growth rate.

When responding to concerns about whether there is a bubble in the “AI investment cycle,” TSMC Chairman and CEO C.C. Wei admitted: “I am also nervous about this... but AI demand is real—not only real, but it is being integrated into daily life.” The company’s analysis holds that the key bottleneck currently constraining the AI industry is TSMC’s frontend wafer production capacity, rather than power supply or financing conditions, and that capacity tightness is mainly in wafer manufacturing rather than backend packaging.

Structural Gross Margin Boost, Profitability Exceeds Expectations

TSMC’s Q4 gross margin reached 62.3%, not only above the company’s previous guidance range of 59%-61% but also surpassing the market’s average expectation of 60.8%. Its operating margin for the quarter was 54%, also outpacing the market’s forecast of 51%. The company further raised its Q1 gross margin guidance to 63%-65%, well above BofA Merrill Lynch’s estimate of 60.9% and the general market expectation of 60.0%.

The J.P. Morgan report notes that TSMC has raised its long-term structural gross margin target from “53% and above” to “56% and above,” mainly thanks to better pricing power and improved operating efficiency. The company also raised its return on equity target from 25% to nearly 30%. Although initial N2 process mass production in the second half of 2026 may temporarily dilute gross margin, overall annual profitability is expected to remain at a high level.

BofA Merrill Lynch analyst Haas Liu believes TSMC’s margin expansion is driven by two factors: first, continued price hikes at advanced process nodes and process migration resulting in more than 20% CAGR; second, the higher share of advanced process products priced at a premium.

Additionally, the company’s dominant market share in advanced processes, along with capacity allocation optimization from traditional mature processes to advanced packaging, also helps sustain more stable and sustainable capacity utilization levels.

Semiconductor Equipment Stocks Benefit, AI Investment Cycle Continues

TSMC’s substantial raise in capital expenditure outlook directly benefits the Asian semiconductor equipment sector. The Goldman Sachs report says that companies like Tokyo Electron and Advantest are expected to see strong upside. Meanwhile, SK Hynix is also accelerating the pace of new plant operations to cope with the rapidly increasing demand for DRAM memory chips.

According to media reports, OpenAI plans to launch its first AI chip Titan by the end of 2026, collaborating with Broadcom for development and using TSMC’s 3-nanometer process. The follow-up model, Titan II, is expected to upgrade to TSMC’s A16 process. OpenAI has also selected Samsung’s 2nm Exynos chip for its AI-powered "Sweetpea" earphones.

On the institutional ratings front, J.P. Morgan maintains an “overweight” rating on TSMC, with a target price of NT$2,100, based on a 2027 expected P/E of 20x. BofA Merrill Lynch also maintains a “buy” rating, with a target price of NT$2,150. Analysts believe the company will continue to enjoy a favorable cycle of high growth and margin expansion, primarily due to continuing investment in AI and a favorable pricing outlook.

Goldman Sachs analyst Johnstone concludes that TSMC has long been seen as the key capacity bottleneck in the AI supply chain, given its previously cautious approach to capital investment. Now, management has not only raised spending guidance far beyond optimistic expectations, but also made it clear that investment plans for the next three years will be “significantly higher.” This is a clear positive signal for the entire semiconductor equipment and AI sector, implying that the main capacity bottleneck is starting to accelerate supply release.

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