TSMC beat Q3 with 51% net margins and lifted 2026 growth to 44%. After an 11% pullback, 21 times forward profit is too low for 20% growth to $554.37.
Key points
- $46.7 billion of third quarter sales beat July guidance and rose 51% from last year on AI compute demand.
- 51% net margin in the quarter held even as new node ramp cut gross margin to 66.4%.
- $53.3 billion of fourth quarter sales at the midpoint guides full year growth near 44% in dollars.
The call
The discount looks too wide after the selloff. At $424.50 the ADS trades at 21 times my forward profit. That multiple is low for 50% margins and tight leading edge supply.
Quarterly revenue and net income in Taiwan dollars- Revenue NT$B
- Net income NT$B
Company releases Oct 2024-Oct 2026; Q4 FY26E is author's estimate.
Growth can still beat that discount. I expect $209.1 billion of sales next year at a 50% net margin. That funds $20.16 of profit per ADS on new node capacity.
Valuation
| Driver | Estimate |
|---|
| 2026 revenue | $174.2 billion, up about 44% in dollars |
| 2027 revenue | $209.1 billion, up 20% in dollars |
| 2027 ADS profit | $20.16 per ADS at 50% net margin |
| Target multiple | 27.5 times 2027 profit for the foundry leader |
| 12-month target | $554.37 per ADS for 30.6% upside |
Target by multiple on 2027 profit per ADSAuthor's arithmetic on 2027 ADS profit of $20.16; current price $424.50.
A 27.5 multiple fits 50% margins with tight leading edge supply. Cash near NT$3,622 billion funds heavy build with limited debt stress. Upside near 31% with small downside if AI holds makes this a strong buy.
Risks
- AI data center funding or power stalls orders, which you would see in HPC share falling from 68% of sales.
- New node and overseas plant costs dilute margins, which you would see in gross margin below 65% for two quarters.
- Taiwan or export controls disrupt shipments, which you would see in dollar guidance cuts for the next quarter.
What would change my mind
I would turn neutral if dollar revenue growth falls below 10% next year with net margin under 44% for two quarters.