TSMC shatters profit records as AI boom accelerates, but shares falter despite stellar earnings

Taiwan Semiconductor Manufacturing Co. (TSMC) delivered record-breaking third-quarter revenue and profits that surpassed market expectations, yet its shares struggled as investors weighed the sustainability of the AI boom against increasingly lofty valuations.

Record earnings exceed market expectations

TSMC, the world's largest contract chipmaker, reported another exceptional quarter at its Oct. 15 earnings conference, underscoring its pivotal position in the global semiconductor industry.

Third-quarter revenue surged 50.9% year-on-year to NT$1.494 trillion (US$46.72 billion), exceeding both analysts' expectations and the company's earlier guidance of US$44.6 billion to US$45.8 billion.

Net profit surged 68.7% year-on-year to a record NT$763.06 billion, while earnings per share climbed to NT$29.43 from NT$17.44 a year earlier.

Profitability remained formidable, with gross margin reaching 66.4%, within the company's projected range of 65% to 67%, and operating margin standing at 58.7%, exceeding the upper end of its previous guidance by 0.7 percentage points.

Nevertheless, gross margin declined 1.3 percentage points from the preceding quarter, primarily reflecting the initial ramp-up of TSMC's two-nanometer manufacturing technology.

The results reinforced TSMC's dominance in advanced semiconductor manufacturing, even as it saw some pressure on margins during its rapid expansion of cutting-edge production capacity.

September revenue highlights unrelenting AI demand

The earnings announcement followed another milestone in September, when TSMC generated NT$511.86 billion in revenue, representing a remarkable 54.6% increase from a year earlier, despite a marginal 0.6% sequential decline from August.

Cumulative revenue for the first nine months reached NT$3.899 trillion, up 41.1% year-on-year.

Such performance reflects sustained demand for advanced processors powering AI infrastructure, alongside contributions from smartphones and other applications.

According to TSMC’s Quarterly Management Report, high-performance computing accounted for 68% of third-quarter revenue, up from 57% a year earlier, underscoring the growing importance of AI-related demand to TSMC's business.

Smartphones contributed another 21%, down from 30% in the corresponding period last year, although revenue from the segment increased 10% quarter-on-quarter. Internet of things and automotive each contributed 4%.

Advanced manufacturing technologies remained central to the company's competitive advantage. Process technologies at seven nanometers and below represented 79% of wafer revenue, including 33% from three-nanometer technology and 8% from its increasingly important two-nanometer process.

TSMC raises outlook as expansion accelerates

Chairman and CEO C.C. Wei (魏哲家) struck an optimistic tone during the earnings conference, emphasizing that demand for AI-related semiconductors showed no discernible signs of slowing.

The company raised its full-year US dollar revenue growth forecast to approximately 44%, from its previous projection of slightly above 40%.

For the fourth quarter, TSMC anticipates revenue of US$52.3 billion to US$54.3 billion, implying approximately 14% quarter-on-quarter growth at the midpoint.

Capital expenditure guidance remained unchanged at US$60 billion to US$64 billion for 2026, as TSMC continues to expand capacity to meet sustained demand for advanced semiconductor technologies, particularly amid the proliferation of AI applications.

The company also expects its cumulative capital expenditure between 2026 and 2028 to significantly exceed that of the preceding three years, reflecting the substantial investments needed to accommodate its customers' long-term growth.

Nevertheless, Wei cautioned that rising component prices and broader economic uncertainties were weighing on consumer-oriented and price-sensitive markets, prompting the company to adopt a prudent approach to business planning for 2027. Demand for its leading-edge technologies, however, remained exceptionally robust.

Strong fundamentals but unenthusiastic investors

Despite the impressive results, TSMC's share-price performance presented a conspicuous contrast.

Its US-listed shares declined approximately 1.8% following the Oct. 15 announcement, while Taiwan-listed shares remained subdued.

The weakness followed a broader retreat in semiconductor stocks amid mounting questions about whether the enormous investments underpinning the AI boom would generate commensurate returns.

Investors also appeared reluctant to reward results that, although exceptional, came after substantial share-price appreciation earlier in the year.

Wei himself acknowledged the disappointing market reaction on Oct. 16 at a book launch event, joking that he had anticipated a decline following the earnings announcement and was consequently in a less-than-cheerful mood, according to Economic Daily News.

Nevertheless, major investment banks remained broadly optimistic about TSMC's prospects, according to Economic Daily News.

It stated that BNP Paribas raised its price target for the company's Taiwan-listed shares to NT$3,090, citing resilient AI-chip demand, emerging growth opportunities in CPUs, and a favorable outlook for its two-nanometer and 14-nanometer manufacturing technologies.

Aside from the price target, BNP Paribas also raised its earnings-per-share (EPS) forecasts for 2026 through 2028 by 3% to 10%.

For TSMC, the divergence between extraordinary financial performance and restrained investor enthusiasm highlights an increasingly demanding market environment: Delivering record earnings may no longer suffice when expectations have already risen to extraordinary heights.