Which TSMC are you buying: the one at 27x earnings or the one at 44x cash?

A record NT$763 billion profit, and the stock fell for the fourth time in five quarters

TSMC ($TSM) reported the quarter to September 2026 on 15 October 2026 with revenue of $46.72 billion, up 41.2% on the same quarter of 2025 and above the $44.6-45.8 billion it had guided. Net income reached NT$763.06 billion, or $4.60 per ADR against the $4.45 analysts expected. Gross margin was 66.4%, operating margin 58.7% - above the 56-58% guidance.

Guidance moved up too. Revenue for the quarter to December 2026 is set at $52.3-54.3 billion, and 2026 growth in dollars was lifted to around 44% from slightly above 40% guided in July 2026.

The ADR dropped 1.8% the next day. That is the pattern now: after the last five beats the next-day moves were -1.8%, -2.8%, -1.3%, +4.4% and -0.1%. At $412.59 the stock sits 15.1% below its 52-week high of $487.47, with an RSI of 34 - a reading that usually marks a stock close to oversold - and 4.4% above its 200-day average of $395.05.

27x earnings says cheap, 44x free cash says expensive: the $64 billion reason

On profit, TSMC is the cheapest name in its peer table. A P/E of 27.2x compares with a semiconductor industry median of 42.7x, and a PEG of 0.80 means the market pays less than one year of expected growth for each unit of earnings - normally the sign of a bargain. The multiple has fallen from 28.5x at the end of 2025 while the price rose 36%, because earnings grew faster than the share price.

On cash the picture flips. The stock trades at 44.3x free cash flow, a free cash flow yield of 2.26% (what the cash left after investment earns you on the price you pay) against a technology sector median of 3.86%. The reason is the capex bill. In the September quarter TSMC generated NT$919.77 billion from operations, spent NT$443.21 billion on equipment and fabs, and kept NT$476.56 billion as free cash - 62 cents of every profit dollar.

The bill grows from here. Capex in the first three quarters of 2026 was about NT$1,290 billion, roughly $40 billion. The 2026 budget was reiterated at $60-64 billion on 15 October, which implies $20-24 billion in the December quarter alone, against $13.8 billion in the September quarter. Management also expects 2026-2028 capex to be significantly higher than 2023-2025, gross margin dilution from overseas fabs to widen to 3-4 percentage points, and the December-quarter gross margin at 65-67%, down from a 67.7% peak in the June quarter.

Fair value $285.55: why half the model looks past the record profit

The FPI fair value is $285.55, which puts the price 30.8% above it. Half of the blend is a discounted cash flow, which values a business on the cash left after reinvestment, not on reported profit. For a company that turns record profit into record capex, the distance between the two is wide and getting wider.

The inputs cut both ways. A net margin of 51.5%, return on equity of 41.4% and return on invested capital of 28.9% are the kind of numbers that lift any DCF. A 2.26% free cash flow yield, a reinvestment plan that rises faster than cash from operations through 2028, and the country-risk premium that a Taiwan-based company carries in its discount rate pull the other way.

The arithmetic of the blend shows which side wins. The peer lens (30%) compares TSMC's EV/EBITDA of 18.5x with an industry median of 27.5x and its P/E of 27.2x with 42.7x - that component can only push the fair value up. The consensus lens (20%) rests on a mean target of $582.71, far above the price. For the blended result to land at $285.55, the cash-based half has to sit well below the current price.

Street vs model: the lowest target on Wall Street is $214 above the model

Of 25 analysts, 18 rate the stock a buy and 7 a hold; none rates it a sell. Targets run from $500 to $700 with a median of $560 and a mean of $582.71 - 104% above the FPI fair value. Even the lowest target is $214 above the model.

The direction of travel is up while the price goes down. Barclays moved to $670 on 16 October 2026 with the stock at $422; Needham to $560 on 15 October from $530; Stifel set $515 on 1 September; Bernstein $554 on 11 August. Targets issued in the last month average $615, against $565.80 for the last quarter.

The gap has a simple source. Banks price 2027 earnings at a growth multiple: the $560 median is about 28x the Q4 EPS estimate of $5.06 annualised. The model prices cash after a capex bill that grows through 2028. One detail suggests the Street has not finished moving: the consensus revenue estimate for the December quarter is $52.38 billion, at the very bottom of the $52.3-54.3 billion guidance.

What moves the number: a 65% margin, $20 billion of quarterly capex and the $395 line

For the fair value to close in on the price, free cash has to catch up with profit. A December-quarter gross margin at or above 67% despite the 2nm ramp, revenue above the $54.3 billion top of guidance, or a 2027 capex budget that grows slower than revenue - each narrows the gap. The other direction: gross margin below 65%, a 2027 budget above $75 billion, or consumer weakness showing up in the monthly revenue reports.

Three dates and two price levels to watch:

• Around 10 November 2026: the October revenue report, the first read on the December quarter.
• 21 January 2027: Q4 results and the 2027 capex budget; EPS estimate $5.06, revenue $52.38 billion.
• 10 December 2026: the NT$7.00 quarterly dividend goes ex, with payment on 7 January 2027.
• $395.05, the 200-day average, with the price 4.4% above it; $487.47, the 52-week high, 18.1% above the price. The model's $285.55 is further away than either.