TSMC's 2026 Start: A Case of Priced-In Beats and Guidance Gaps

The fourth-quarter results were a textbook beat, but the market had already priced in a strong quarter. TSMC's numbers were solid, but the real story was the expectation gap that opened up in the forward guidance. Revenue came in at NT$1.046 trillion ($33.73 billion), beating the consensus of NT$1.034 trillion. Net income hit NT$505.74 billion, topping the NT$478.37 billion estimate. More importantly, the company posted a 35% increase in fourth-quarter profit and extended its streak of consecutive profit growth to eight quarters.

The standout was the margin performance. Gross margin hit 62.3%, well above the 60.6% estimate and the upper end of management's own guidance. Operating margin of 54% similarly crushed the 50.9% consensus and the high end of the company's forecast. This wasn't just a beat; it was a margin beat that signaled exceptional execution and pricing power, likely driven by the continued dominance of AI-related high-performance computing chips.

Yet, for all the strength, the stock's 12%+ year-to-date run-up suggests the market had already baked in a good quarter. The Q4 print was strong, but it wasn't a surprise. The real catalyst was the forward view that followed.

The Q1 Guidance: Creating a Clear Expectation Gap

The forward guidance is where the real expectation gap opens. Management's Q1 revenue forecast of $34.6 billion to $35.8 billion is a significant step up from the pre-earnings consensus of $33.2 billion. This creates a clear upside surprise baked into the forward view, testing the classic "sell the news" dynamic for the Q4 beat.

More importantly, the guidance implies a strong sequential ramp. It calls for revenue to jump roughly 11% from the Q4 actual of $33.73 billion. That's a robust beat on the prior quarter's results and signals management sees demand accelerating, not just holding steady. The margin guidance is equally bullish, with gross margin expected to hit 63-65%, well above the 62.3% actual and the 59-61% range previously forecast. This isn't just a top-line beat; it's a margin expansion story that management is now pricing in.

The raised capex guidance of $52 billion to $56 billion for 2026 is the key bullish signal. This is a major increase from 2025 and signals management's confidence in sustaining high demand. It's a tangible bet on the AI cycle's longevity, moving beyond just a good quarter to a multi-year build-out. For the market, this capex figure is a powerful validation of the AI-driven demand narrative. It suggests the company is investing aggressively to meet what it believes is durable, not fleeting, customer needs.

The bottom line is that the market has now priced in a more optimistic future. The Q4 beat was expected; the Q1 guidance is the new reality. The expectation gap has shifted from the past quarter to the coming months. If TSMC can hit this raised bar, the stock may have further room to run. If it misses, the gap could close sharply.

Valuation and Sustainability: The AI Demand Test

The raised capex plan is the bullish signal that the market is now pricing in. With $52 billion to $56 billion in capital spending for 2026, TSMC is making a massive bet on the AI cycle's longevity. This isn't just about building more capacity; it's a commitment to a multi-year expansion that requires sustained, high-demand orders. The primary catalyst for the stock's valuation is the execution on this plan and the ability to meet the aggressive Q1 revenue target, which will be monitored in the next earnings report. If TSMC can ramp production and sales as guided, it will validate the capex investment and likely support further multiple expansion.

Yet, a key risk to that valuation is the sustainability of the AI-driven demand that is the core growth story. Management itself expressed nervousness about the boom's longevity, with CEO C. C. Wei stating, "I'm also very nervous about it". This candid admission highlights the central expectation gap. The market has priced in a durable AI cycle, but the company's leadership sees it as a high-stakes, uncertain bet. The raised capex is a hedge against that uncertainty, but it also creates a higher bar for performance. Any stumble in meeting the close-to-30% annual revenue growth forecast for 2026 would force a painful reassessment of the investment thesis.

External factors provide a supportive backdrop but remain a long-term overhang. Recently, the U.S. granted a key license to TSMC that allows it to import equipment for its Nanjing plant, easing a potential supply chain disruption. While the direct revenue impact is limited, the news provided a positive sentiment boost and signaled a more stable operating environment. More broadly, the global AI investment frenzy, with data center spending now surpassing $1 trillion, supports the demand narrative. However, the geopolitical overhang from U.S. export controls persists, even as TSMC works to close the supply-demand gap internationally.

The bottom line is that TSMC's valuation now hinges on a successful execution of its aggressive build-out. The raised capex and guidance have reset expectations higher. The stock's path will be dictated by whether the company can deliver on that promise, turning its nervousness into a proven, profitable reality.