Lubin Investment · Blog

Taiwan Semiconductor (TSM): Q2 2026 results, my verdict

2026-07-16 ·

Taiwan Semiconductor Manufacturing: see the full analysis on Lubin Investment

Taiwan Semiconductor posted record revenue of 40.2 billion dollars, up 34% year over year, and net income up 77%, driven by AI chip demand. The company raised its full year guidance and its capital spending budget. Here is what these numbers change for my thesis on one of the cheapest stocks in my quality filter.

A fifth straight record quarter

Taiwan Semiconductor Manufacturing Company, the world's largest contract chipmaker, reported revenue of 40.2 billion dollars for its second quarter on July 16, 2026. That is up 33.7% year over year and 12% quarter over quarter, at the top end of the guidance the company itself gave three months earlier (39.0 to 40.2 billion).

Net income jumped 77.4% year over year, a record for the fifth consecutive quarter. Earnings per ADR came in at 4.31 dollars, above the 3.81 dollars analysts expected: a clear beat, not just a confirmation. Gross margin reached 67.7%, a level almost no heavy industrial business in the world can match: out of every 100 dollars of sales, nearly 68 remain before even counting sales and administrative costs.

Where the acceleration comes from: AI has a physical need for chips

The explanation fits in one number: high performance computing (HPC, the chips that power data centers and AI model training) now makes up 66% of TSMC's revenue. Three years ago, this segment weighed far less than smartphone chips. TSMC does not sell ChatGPT or any AI model itself: it sells the silicon these models run on, for Nvidia, AMD, Apple, and the cloud giants that now design their own chips.

One technical detail explains why TSMC captures such a large share of this demand, and not just as a generic foundry: CoWoS, short for Chip-on-Wafer-on-Substrate. It is an advanced packaging technique that stacks and connects several chips, a processor and very high bandwidth memory, on the same substrate, a step required to build the most powerful AI accelerators. TSMC is today the world's leading supplier of this technology, and CEO C.C. Wei repeated it on the earnings call: CoWoS capacity is sold out through the end of 2026. In practice, TSMC is not chasing demand, its customers are queuing for it, which gives the company rare pricing power for a heavy industrial business.

The real signal of the quarter: a raised full year forecast, not the past quarter

What matters most in an earnings report is never the quarter that already happened, largely known in advance within a few percent. It is what management says about tomorrow. And here the signal is strong: TSMC raised its full year 2026 revenue growth forecast to more than 40% in dollar terms, up from more than 30% guided the previous quarter. For the third quarter, the company expects revenue between 44.6 and 45.8 billion dollars, with an operating margin of 56% to 58%, helped by the ramp up of its most advanced process technology, 2 nanometers.

Another signal, quieter but just as telling: the capital expenditure budget (capex, the money poured into building and equipping factories) climbed from a prior range of 52 to 56 billion dollars to a new range of 60 to 64 billion for 2026. Building a leading edge semiconductor fab takes several years and tens of billions of dollars before it produces a single sellable chip: when a company raises this budget so sharply, it means it is convinced demand will still be there in two or three years, not just this quarter. C.C. Wei also announced an additional 100 billion dollar investment in Arizona, bringing the group's total commitment in that US state to 265 billion dollars.

What this changes for quality and for price

My quality filter, which judges 12 objective financial criteria (profitability, sales and cash growth, buybacks, margins, debt, return on capital), already validated 10 out of 12 criteria for TSMC before this release. Today's numbers simply confirm what the score already said: expanding margins, 44.6% profitability, 26.7% return on invested capital. This quarter changes nothing about the quality of the business, it confirms it one quarter ahead.

The real debate stays exactly where it was before this release: price. TSMC's P/FCF (price-to-free-cash-flow, the share price divided by the cash the company actually generates each year) sits around 2 times, an extraordinarily low level for a company scored this highly by my filter. For comparison, most businesses of this quality trade at 15, 20, sometimes 30 times their cash. This is not a market anomaly or a calculation error: it is the price investors accept for a company whose production capacity is overwhelmingly concentrated in Taiwan, a few hundred kilometers from mainland China. The market has priced in a geopolitical risk premium for years, and this earnings report neither inflates nor deflates that risk: Taiwan remains Taiwan.

What these results do change is how much conviction one can have on the other half of the thesis: does the business deserve its score despite that risk? A fifth straight record quarter, a forecast raised two quarters in a row, and an advanced packaging order book sold out through year end are three signals pointing the same way: execution is excellent. If you believe the Taiwan risk is already largely priced in, every quarter like this one strengthens the case that the discount is too wide given the actual quality of the business.

What I am watching next

Three things are worth tracking over the coming months. First, whether TSMC turns this raised forecast into reality in the third quarter (44.6 to 45.8 billion dollars guided). Second, the ramp up pace of 2 nanometer production, the company's most advanced and most profitable technology, which needs to take over from 3 nanometer as the main margin driver. Third, any signal, even indirect, on the relationship between Taiwan and China: this is the one variable in this thesis that depends on no earnings quarter at all.

How I read it

I never recommend a specific stock, but this quarter shows well why I always separate quality from price. On quality, TSMC leaves almost no doubt: near flawless execution, a de facto monopoly on the most advanced chips, pricing power visible in a CoWoS order book sold out through 2026. On price, nothing changed today: the P/FCF stays around 2 times, one of the lowest levels my filter observes on a company scored this highly, precisely because the market keeps paying for geopolitical risk, not for fundamentals. That is exactly the kind of gap between quality and price I wanted to be able to spot in seconds for any stock, which is what led me to build my analysis tool. See the full breakdown on the TSMC analysis page, the ranking of top rated stocks, and my methodology.

FAQ

What is CoWoS and why does it matter so much for TSMC?

CoWoS (Chip-on-Wafer-on-Substrate) is an advanced packaging technique that stacks a processor and very high bandwidth memory on the same substrate, a step required for the most powerful AI accelerators. TSMC dominates this market, and its capacity is sold out through the end of 2026, giving it real pricing power.

Why is TSMC raising its capital spending (capex) so much?

Building a leading edge semiconductor fab takes several years and tens of billions of dollars before the first sellable chip. Raising the budget from 52-56 to 60-64 billion dollars means management is convinced AI demand will stay strong two to three years out, not just this quarter.

Has the Taiwan risk gone away with the Arizona investment?

No. The 265 billion dollars committed to Arizona diversifies a small part of production geographically, but the bulk of TSMC's leading edge capacity remains concentrated in Taiwan for many years to come. The market still prices in this risk.

Should I buy TSM stock after these results?

The results confirm excellent execution and a low valuation (P/FCF around 2 times) relative to quality. But the geopolitical risk remains fully in place and depends on no earnings quarter. This is not personalized investment advice, do your own research.

What is high performance computing (HPC)?

HPC covers the chips used in data centers and AI model training, as opposed to chips for smartphones or connected devices. This segment now makes up 66% of TSMC's revenue.

Taiwan Semiconductor Manufacturing: see the full analysis on Lubin Investment

About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).