TSMC 2Q26 guidance preview: AI demand offsets smartphone weakness, maintaining Overweight and Top Pick

Overview

This report is Morgan Stanley's preview of TSMC's 1Q26 earnings call and 2Q26 guidance. It argues that although smartphone semiconductor demand is starting to soften, especially as a China smartphone SoC customer cuts 4nm wafer orders, AI, HPC, networking and design-services demand are sufficient to absorb the capacity. Morgan Stanley therefore maintains TSMC's Overweight rating, NT$2,288 target price and Top Pick status.

Core views

Core views include: first, 1Q26 revenue is likely to come in above guidance again, mainly driven by AI demand and pre-buys in some consumer categories; second, 2Q26 revenue is expected to grow 5%-10% Q/Q, with gross margin around 64%-65%; third, AI semiconductor demand remains in the early phase of an upcycle, accelerating capacity build-out at 3nm, 2nm and more advanced nodes; fourth, weak smartphone demand has limited impact on TSMC because it is absorbed by AI networking, HPC and design-services customers; fifth, long-term valuation re-rating comes from a higher AI revenue mix, the scarcity of advanced nodes, stronger pricing power and resilient long-term gross margins.

Analysis framework

The report uses a combined framework of earnings-call previews, channel checks, capacity roadmaps, AI semiconductor market-size forecasts, order-change tracking and residual income valuation. It focuses on comparing the strength of AI and non-AI demand, assessing the supply-demand balance for advanced-node capacity, capex, pricing and gross margin linkages, and mapping these assumptions to 2026-2029 revenue growth and valuation.

Methodology notes

• Valuation methodsResidual income valuation

  Residual income valuation

  The 12-month target price is derived using a residual income valuation model, with key assumptions including a 9.2% cost of equity, 1.2 beta, 6.0% risk premium, 2.0% risk-free rate, 10.5% mid-cycle growth rate and 4.0% terminal growth rate.

• scenario_analysisRisk reward framework

  Risk-reward scenario analysis

  The report uses Base, Bear and Bull scenarios to assess the impact of advanced-node leadership, AI semiconductor demand, Intel/Samsung competition, gross margin, capex and the demand cycle on valuation.

• industry_demandAI semiconductor revenue CAGR model

  AI semiconductor revenue CAGR forecast

  Based on the AI chip market, migration to advanced nodes, HPC/network/CPU/GPU/ASIC demand and customer capex, the report forecasts TSMC's AI semiconductor foundry revenue to grow at a c. 60% CAGR from 2024 to 2029e.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• TSMC / 2330.TW

  Core coverage name

  Strengths

  Leading position in advanced logic foundry, strong 3nm/2nm demand, rapid AI semiconductor revenue growth, customer orders can offset smartphone weakness, and long-term pricing power is improving.

  Weaknesses

  Weak smartphone and PC demand outside AI, rising overseas fab costs, and high capital intensity for advanced-node expansion.

  Comparison

  Relative to Intel and Samsung, the report believes TSMC continues to hold leading market share in 16nm, 7nm, 5nm, 3nm and 2nm; however, Intel Foundry, Samsung and Tesla TeraFab are highlighted as competitive variables to watch.

  Risks

  AI demand falls short of expectations, Intel/Samsung succeed in advanced-node foundry execution, 2nm demand proves insufficient because customers face higher transistor costs, overseas fab costs rise materially, or geopolitics and war disrupt supply and gross margins.

• TSM.US

  TSMC U.S. ADR mapping

  Strengths

  Represents the same equity exposure as 2330.TW and benefits from the long-term growth logic of AI semiconductors and advanced nodes.

  Weaknesses

  The ADR price is also affected by exchange rates, market risk appetite and the valuation environment for U.S. tech stocks.

  Comparison

  Fundamentally the same as 2330.TW, but with different trading market and investor base.

  Risks

  The same fundamental risks as TSMC, plus cross-market liquidity and exchange-rate factors.

• AI semiconductor supply chain

  Key demand source

  Strengths

  Demand from Nvidia, TPU, Trainium3, CPUs, networking chips, ASICs and HBM base dies keeps advanced-node supply tight.

  Weaknesses

  Demand is highly dependent on global cloud/AI capex and customer product cycles.

  Comparison

  AI demand is clearly stronger than non-AI semiconductor demand such as smartphones and PCs.

  Risks

  Macroeconomic uncertainty, inflation or a recession could pull back corporate and consumer demand, thereby slowing AI capex.

Key data

• 2Q26 revenue guidance expectation5%-10% Q/Q growthMorgan Stanley expects HPC, AI and networking customers to offset the cut in smartphone semiconductor orders.
• 2Q26 gross margin expectationc. 64%-65%Improved capacity utilization, but rising war-related chemical costs may be a countervailing factor.
• 2026e capital expenditureUS$52-56bnThe report expects the company to keep its long-term guidance.
• 2027e capital expenditure expectationUS$65bnDriven by the earlier ramp-up of advanced-node capacity in Taiwan and Arizona.
• 2028e capital expenditure expectationUS$70bnAdvanced nodes and AI demand continue to accelerate capacity build-out.
• AI semiconductor revenue CAGR2024-2029e c. 60%Above the company's prior guidance of the mid-/high-50s range.
• 2029 AI chip foundry revenueUS$116bnAbout 43% of TSMC's 2029 revenue.
• TSMC revenue CAGR2024-2029e 20%-25%General server CPU and networking demand offsets weakness in PCs and smartphones.
• China smartphone SoC order cut20-30k wafersCorresponding potential shipment decline of 15-20 million chips.
• Valuation16x Morgan Stanley 2027e EPSClose to the 16.5x average NTM P/E since 2018; the report considers the valuation attractive.
• Target priceNT$2,288Unchanged, implying a 2027e target P/E of about 20x.

Impact & implications

For investment implications, the report views near-term smartphone weakness as a disturbance that can be absorbed by AI and HPC demand, rather than a turning point that weakens TSMC's long-term growth story. If 2Q26 guidance merely meets expectations, share-price catalysts may be limited; however, shortages in advanced-node capacity, a higher AI revenue mix, wafer price increases and sustained long-term gross margins still support TSMC as the top pick in Greater China semiconductors.

Risks

• Smartphone, PC and broader consumer semiconductor demand is weaker than expected.
• Intel or Samsung succeeds in advanced-node foundry execution, eroding TSMC orders and market share.
• Tesla TeraFab or other new foundry or vertically integrated solutions create competition for long-term AI and automotive opportunities.
• War disrupts energy, chemical supply or fab operations, pushing up costs and compressing gross margin.
• Overseas fab costs rise materially, pressuring capex returns.
• 2nm demand falls short of expectations because customers face higher transistor costs.
• AI semiconductor demand or cloud capex is below expectations, limiting advanced-node utilization and pricing upside.
• Morgan Stanley has business relationships and potential conflicts of interest with the covered company, and investors should treat this research as only one factor in investment decisions.

What to watch

• TSMC's 1Q26 earnings call on April 16 for guidance on 2Q26 revenue, gross margin and long-term AI semiconductor CAGR.
• Whether the China smartphone SoC order cuts widen, and whether AI networking and design-services customers can continue to absorb the released 4nm capacity.
• The pace of capacity build-out for 3nm, 2nm, 1.6nm, 1.4nm and 1.0nm nodes, especially in Taiwan, Kumamoto in Japan and Arizona.
• Whether the 2026e US$52-56bn, 2027e US$65bn and 2028e US$70bn capex expectations are revised up or delivered as expected.
• Advanced packaging competition, especially the technical and cost viability of Intel EMIB-T, CoWoS-L and CoPoS for large-die demand.
• Whether war-related energy and chemical costs continue to affect fab operations and gross margin.
• Whether TSMC can maintain long-term gross margin above 56% through the scarcity of advanced nodes and pricing power with large customers.