Taiwan Semiconductor Manufacturing Co (TSMC) delivered a stronger-than-expected third-quarter profit on Thursday, driven by robust demand for artificial intelligence chips. However, the stock remains under pressure as investors scrutinize the escalating costs of the semiconductor boom.
The world's largest contract chipmaker reported net income of NT$763.06 billion for the September quarter, up 68.7% from a year earlier and surpassing the NT$746.3 billion LSEG SmartEstimate. Revenue climbed 50.9% to NT$1.49 trillion, with diluted earnings reaching NT$29.43 per share, or $4.60 per ADR.
Despite the earnings beat, TSMC's US-listed shares closed Wednesday at $430, down 3.4% amid a broader sell-off in technology stocks. Options pricing implied a move of roughly 4% through the end of the week, putting the quality of the beat under particular scrutiny.
Margins Hold Up Despite 2nm Ramp
The strongest part of the report was profitability. TSMC posted a gross margin of 66.4%, comfortably within its 65% to 67% guidance range. Operating margin reached 58.7%, above the top of management's 56% to 58% forecast, while net margin stood at 51.1%.
That matters because investors had been watching for signs that the rapid ramp of 2-nanometre production and higher overseas manufacturing costs were beginning to dilute returns. Instead, advanced nodes continued to dominate the mix. Two-nanometre chips accounted for 8% of wafer revenue, while 3nm contributed 33% and 5nm another 28%. Technologies of 7nm or more advanced represented 79% of wafer sales.
Bank of America analyst Haas Liu had expected a gross margin near 67% ahead of the report and described TSMC's valuation at about 16 times estimated 2027 earnings as "undemanding," according to TipRanks.
Profit Beat Shifts Attention to Guidance
The earnings beat was notable because third-quarter revenue was already largely known from TSMC's monthly sales disclosures. The bigger question for TSMC stock is therefore what management says next.
The company's initial earnings release did not include fourth-quarter revenue or margin guidance. Investors will look for those figures on Thursday's earnings call, together with any update to TSMC's full-year growth expectations.
Morgan Stanley analyst Charlie Chan had expected management to raise its 2026 revenue-growth outlook into the low-to-mid 40% range from guidance for growth of more than 40%. A stronger outlook would reinforce the view that demand from Nvidia, Apple and custom AI-chip customers remains strong enough to offset the rising cost of new capacity.
AI Spending Remains the Bigger Test
TSMC's results land at a difficult moment for AI stocks, with investors questioning whether enormous infrastructure spending can continue producing sufficient returns. That makes capital expenditure and capacity commentary almost as important as the quarter itself.
TSMC raised its 2026 capex forecast in July to $60 billion-$64 billion as it expands advanced nodes, packaging capacity and overseas fabs. The company has also committed $265 billion to its Arizona manufacturing build-out and is evaluating potential expansion in Texas.
Morningstar analyst Phelix Lee told Reuters that Texas was "a good location for a 2030s or 2040s expansion grand plan," while seeing limited urgency as Arizona capacity is still being built.
This article is for informational purposes only and does not constitute financial advice.
