What They Do
Taiwan Semiconductor Manufacturing Company (TSM) is the world's largest contract chip manufacturer, producing semiconductors for companies that design but don't manufacture their own chips. They serve tech giants like Apple, NVIDIA, and AMD by manufacturing everything from smartphone processors to AI chips using the most advanced fabrication technologies available. TSM makes money by charging per wafer manufactured, with premium pricing for cutting-edge processes.
Investment Thesis
**AI semiconductor goldmine** — AI accelerator revenue growing at mid-to-high 50s% CAGR through 2029, already representing high-teens percent of total 2025 revenue**Technology moat widening** — 2nm successfully entered high-volume production in Q4 2025 with "bigger node than 3nm from the start," while advanced technologies (7nm and below) represent 77% of wafer revenue**Explosive growth trajectory** — Management raised 5-year revenue outlook to ~25% CAGR (2024-2029) with 2026 growth expected "close to 30%" following 36% growth in 2025Key Risks
**Massive capital intensity** — CapEx jumping to $52-56B in 2026 (vs $40.9B in 2025) with "significantly higher" spending planned over next 3 years, pressuring near-term returns**Geographic concentration risk** — Despite Arizona expansion, core production remains Taiwan-based amid ongoing geopolitical tensions with ChinaGrowth Story
TSM is riding the AI wave with revenue growing 36% in 2025 to $122B and expecting close to 30% growth in 2026. The company raised its 5-year revenue growth outlook to ~25% CAGR driven by insatiable demand for AI chips and leading-edge semiconductors. Management describes capacity as "very tight" with the HPC platform (primarily AI and data center chips) representing 55% of Q4 revenue.
Profitability Profile
TSM demonstrates exceptional profitability with gross margins expanding 380 basis points to 59.9% in 2025 and guided to reach 63-65% in Q1 2026. Operating margins hit 50.8% for full year 2025, up 510 basis points year-over-year, while the company targets 56%+ gross margins through the cycle. Free cash flow generation remains robust at $1T TWD in 2025, up 15.2% despite massive capacity investments.
Competitive Position
TSM holds an unassailable lead in advanced semiconductor manufacturing with no meaningful competition at the cutting edge — Samsung and Intel lag significantly in process technology. The company's moat deepens with each new node generation, as the R&D and capital requirements become increasingly prohibitive for competitors. Their 77% share of advanced process revenue reflects this technological supremacy.
Recent Momentum
Q4 2025 results were exceptional with revenue beating guidance by delivering $33.7B (+38% YoY) and gross margins of 62.3% exceeding the high-end of guidance by 130 basis points. The company has consistently beaten earnings expectations across the last four quarters, with revenue beats ranging from 0.4% to 5.1%. Market sentiment appears increasingly bullish as management raised multi-year growth targets and accelerated capacity expansion plans.
What Wall Street Thinks
Analyst sentiment is overwhelmingly positive given TSM's dominant position in AI chip manufacturing and raised growth outlook. The Street appears focused on the company's ability to capitalize on AI demand while managing the significant capital intensity required for expansion. Revenue estimates show strong growth expectations with CY27 revenue projected at $6.1T, representing continued robust expansion.
The Bottom Line
TSM is the essential picks-and-shovels play for the AI revolution, combining an unbreachable technology moat with explosive growth in the world's most important semiconductor market.
