A while ago, Taiwan Semiconductor Manufacturing (NYSE:TSM) posted the kind of quarter that makes a chipmaker look almost unfair. In the second quarter of 2026, revenue climbed 36.0% to NT$1,270.38 billion. Net income and diluted earnings per share both jumped 77.4%. Profits didn’t just keep pace with sales. They ran away from them.
TSMC is a foundry, which means it doesn’t design chips. It manufactures them for the companies that do, charging by the wafer, and its most advanced processes fetch the richest prices. If a new smartphone, laptop, or AI server has a cutting-edge processor inside, there’s a good chance it started life on a TSMC production line.
The catch is the price tag. Investors now pay noticeably more for each dollar of TSMC’s expected earnings than they have on average over the past five years. Whether that premium makes sense depends less on one blowout quarter than on whether the engine behind it is built to last.
The Edge Is Hard to Copy
TSMC’s advantage shows up in what it sells and what it keeps. Advanced technologies, meaning 7-nanometer and smaller processes, made up 77% of wafer revenue in the second quarter. The 3-nanometer node alone accounted for 30%, and 5-nanometer for another 33%.
Those are the chips nobody can make cheaply or quickly, and the margins prove it. Gross margin hit 67.7%, operating margin reached 60.3%, and the company kept 55.6% of revenue as net profit. That’s pricing power, not just volume.
Scale is the other wall. A customer unhappy with TSMC can’t simply move its flagship chips elsewhere, because few rivals offer comparable leading-edge capacity. Any shift would happen slowly and in pieces, which gives TSMC a sticky customer base.
Curious which equipment maker supplies the machines behind the world’s most advanced chips? See which one.
Momentum Hasn’t Blinked
The quarter wasn’t a one-off. September revenue came in at about NT$511.86 billion, 54.6% higher than a year earlier, after August posted a 53.3% gain. For the first nine months of 2026, revenue rose 41.1%. Management expects more. Third-quarter revenue guidance sits between US$44.6 billion and US$45.8 billion, compared with US$40.20 billion in the second quarter.
The next growth layer is already showing up. The 2-nanometer process contributed 3% of wafer revenue in the second quarter, and TSMC’s finance chief pointed to a steep ramp-up of that technology in the third. If anything, the moat looks like it’s widening. As explored in our semiconductor and memory market analysis, other segments of the hardware supply chain are riding parallel waves.
Can Margins Survive the Next Ramp?
Here’s the real worry. Third-quarter guidance calls for gross margin of 65% to 67% and operating margin of 56% to 58%, both below the second quarter’s levels. That outlook lands alongside the 2-nanometer ramp, and brand-new production lines rarely run at peak efficiency from day one. For a stock priced at a premium, even a gentle margin slide can sting.
Still, perspective matters. Even the bottom of that range would leave gross margin at 65%, and the slimmer margin applies to a larger revenue base. Profits can keep growing while margins dip, as long as demand holds.
A Premium With a Purpose
At a forward P/E of 28.44, as of October 6, investors are paying about $28 for every $1 of expected earnings. That’s well above TSMC’s 5-year average of 21.78 and the sector’s 23.74. By traditional measures, the stock isn’t cheap. Growth changes the math. Earnings per share are expected to rise 30.04% in 2027, roughly in line with that forward multiple. A company growing profits around 30% a year while trading in the high 20s isn’t wildly stretched on a growth-adjusted basis.
The bigger question is durability. Expected 2027 growth is far slower than the 77.4% earnings jump TSMC just reported, so the market is already assuming some cooling. The premium only holds if growth settles near that 30% pace rather than sliding toward the company’s historical norms. A business whose newest nodes keep taking a bigger share of revenue has a credible path to doing that. Memory chipmakers are riding the same AI wave from a very different corner of the market. Hedge fund interest ticked up, with 249 funds holding the stock in the most recent quarter, up from 234 in the prior one. Short interest sits at just 0.57% of the float, a sign of relatively limited bearish positioning.
Paying Up for the Indispensable
The evidence suggests TSMC’s premium is earned rather than inflated. Its leading-edge mix keeps growing, revenue momentum hasn’t faded, and expected earnings growth roughly matches the multiple investors are paying.
That makes the setup best suited to long-term growth investors who believe AI-driven chip demand has years left to run and can tolerate the swings of a cyclical industry. If margins keep slipping after the 2-nanometer ramp settles, or monthly revenue growth cools sharply while the multiple stays elevated, that premium would get much harder to defend.
While we acknowledge the risk and potential of TSM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than TSM and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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