TSMC Q3 profit climbs nearly 70% on AI demand; margin guidance dents shares

Released on Thursday afternoon in Taiwan, the earnings figures reinforce the AI investment case for chip and hardware stocks across Asia. TSMC's assessment that demand is outstripping capacity supports equipment and component suppliers throughout the semiconductor chain. The response in the share price, however, shows just how elevated expectations have become: a positive surprise is no longer enough on its own, and investor focus has shifted to margins and cash flow. Taiwan's benchmark index, which gives TSMC an unusually large weight, is expected to take direction from the stock's Taipei trading. A bigger capital-spending plan is a favourable development for chipmaking-tool makers.

Background:

• TSMC looked set to post a sixth consecutive record profit as AI demand lifted third-quarter results

The numbers put the AI surge in concrete terms and signalled no slowdown, but with that outcome already reflected in the price, investors instead worried about margin pressure and the cost of the company's extensive fab construction.

Summary:

• Third-quarter net profit was about NT$763 billion, up nearly 70% and slightly above the LSEG consensus estimate.
• Revenue came to roughly $47 billion, beating the upper limit of TSMC's own guidance.
• Gross margin was around 66%, down from the second quarter as the 2nm ramp got under way.
• AI-heavy high-performance computing delivered 68% of revenue, while 2nm accounted for 8% of wafer revenue.
• Fourth-quarter revenue is guided at $52 billion to $54 billion, and 2026 growth is now seen near 44%.
• The company reaffirmed 2026 capex of $60 billion to $64 billion, and its US-listed shares fell after the release.

Taiwan Semiconductor Manufacturing Co. on Thursday posted a third-quarter net profit that climbed almost 70% from a year earlier and raised its full-year growth outlook, with AI chip demand still not easing. The earnings release failed to give the shares a lift as investors concentrated on the softer margin outlook and the scale of planned expenditure.

Net profit came in near NT$763 billion, a whisker above the analyst forecasts collected by LSEG. Revenue was roughly $47 billion, higher than the best figure in the company's guidance band. Gross margin reached about 66%, sharply better than a year earlier but weaker than in the second quarter. TSMC explained the quarter-on-quarter dip as mostly the result of the early production ramp of its 2-nanometre process.

The revenue mix leaves no doubt about the turn toward AI. High-performance computing, the segment that houses AI accelerators, contributed 68% of revenue, up from 57% a year earlier. The newest 2-nanometre technology supplied 8% of wafer revenue, compared with 3% in the prior quarter.

C.C. Wei, chief executive, said AI demand was “extremely robust” and suggested it would probably outpace the company's earlier long-term growth forecast. Wei added that supply “still falls well short of demand” as TSMC builds close to 20 new fabs, most of them in Taiwan.

For the fourth quarter, TSMC said it expects revenue of about $52 billion to $54 billion and gross margin of 65% to 67%, a midpoint a little lower than in the third quarter. Full-year revenue growth is now seen at around 44% in US-dollar terms, an upgrade from the slightly more than 40% projected in July. The company left its 2026 capital-spending target unchanged at $60 billion to $64 billion. Spending over the next three years, it said, would be considerably higher than in the preceding three.

Those two factors go a long way toward explaining why the market reaction was subdued. The margin outlook points to further dilution as 2-nanometre production scales up, and management said overseas facilities, including Arizona and Japan, will become a heavier drag on margins over time. A larger capex bill also implies reduced free cash flow in the immediate future. With strong growth already anticipated, the earnings beat was not big enough to outweigh those worries.

Looking further out, the story for the AI supply chain remains clearly positive. TSMC's contention that demand is ahead of capacity, combined with its readiness to keep investing, indicates the cycle of capital expenditure still has more to go. Whether margins hold steady as 2-nanometre production matures and whether customers maintain their AI spending plans through next year are the next things to watch.