TSMC: Drop the Beat, Keep Dancing?

TradingKey - As the global leader in semiconductor foundry services, TSMC delivered a truly historic third-quarter performance in 2025. The results not only surpassed the company’s own financial guidance and Wall Street’s expectations but also solidified TSMC’s position as the cornerstone of the global tech industry. This quarter’s stellar performance wasn’t driven by the traditional consumer electronics cycle but by a structural surge in demand fueled by the AI revolution. AI and high-performance computing (HPC) have become the undeniable engines of TSMC’s growth, complemented by its exceptional operational efficiency and ambitious global expansion strategy, showcasing unparalleled competitive strength.

Record-Breaking Financials: Revenue and Profitability Exceed Expectations

TSMC reported third-quarter revenue of $33.1 billion, up 10.1% sequentially and a remarkable 40.8% year-over-year. This growth highlights the company’s robust momentum and the explosive demand for AI-driven solutions, significantly boosting its revenue scale. Even more impressive was the gross margin, which hit 59.5%, far exceeding the company’s guidance of 55.5%-57.5% and improving on the 58.6% in Q2 2025 and 57.8% in Q3 2024. Despite challenges like the appreciating Taiwan Dollar and the costs of scaling new process nodes and overseas fabs, this stellar gross margin underscores TSMC’s exceptional pricing power and operational efficiency.

The operating margin was equally impressive at 50.6%, well above the guided range of 45.5%-47.5% and up from 49.6% in Q2 2025 and 47.5% in Q3 2024. Several factors contributed to this success: optimized product mix with a rapid increase in revenue from high-priced 3nm wafers, faster-than-expected yield improvements in the 3nm process, and near-maximum capacity utilization driven by urgent AI chip orders. These elements collectively highlight TSMC’s mastery of cost control and operating leverage. Even as overseas fab expansions may pressure margins in the future, the efficiency and profitability of TSMC’s core Taiwan operations are expected to offset these impacts, supporting the company’s long-term goal of maintaining gross margins above 53%.

AI and HPC: The Unquestionable Growth Drivers

AI and high-performance computing (HPC) accounted for roughly 60% of TSMC’s revenue this quarter, cementing their role as the company’s primary growth engine. The global AI boom, particularly the soaring demand from giants like NVIDIA, OpenAI, and Oracle for high-performance chips and data center infrastructure, has kept TSMC’s advanced process nodes running at full capacity. NVIDIA’s upcoming Rubin Ultra GPU, built on TSMC’s 2nm process, reflects the urgent need for high-compute chips, further amplified by multi-billion-dollar data center projects from OpenAI and Oracle. The 3nm process contributed 23% of revenue, while the 5nm process accounted for a hefty 37%, both driven primarily by AI and high-compute chip demand that far exceeded expectations.

Meanwhile, the smartphone segment, contributing about 30% of revenue, saw a recovery this quarter, spurred by Apple’s new product launch cycle, which boosted orders for 5nm and 3nm chips. Additionally, automotive electronics and the Internet of Things (IoT) provided diversified support, reducing reliance on any single market and adding stability to TSMC’s growth trajectory.

Optimistic Outlook: Q4 2025 and 2026 Growth on the Horizon

TSMC’s management expressed strong confidence in the outlook for Q4 2025 and 2026. Fourth-quarter revenue is projected at $32.2-$33.4 billion, surpassing analysts’ expectations of $31.2 billion, with gross margins guided at an impressive 59%-61%, potentially setting a new record. While sequential revenue growth may be moderate, the continued margin expansion signals that TSMC’s advanced process nodes are operating at full capacity. For the full year of 2025, TSMC anticipates revenue growth of approximately 35%, driven by sustained AI demand and ongoing technological advancements. To meet this demand, TSMC raised its 2025 capital expenditure to $40-$42 billion, signaling that high-intensity investments may become the norm. The company is accelerating its global expansion, particularly with its “mega-fab cluster” in the U.S., alongside new facilities in Japan and Germany to support customer needs and mitigate geopolitical risks.

On the technology front, TSMC is pushing the boundaries of innovation. The 2nm process is on track for mass production by Q4 2025, ahead of schedule, with the 1.6nm process slated for H2 2026 and the 1.4nm process targeted for 2028. These advanced nodes, optimized for AI and HPC, not only keep competitors like Samsung and Intel scrambling to catch up but also strengthen TSMC’s competitive moat through deep partnerships with key clients like Apple and NVIDIA.

Strategic Partnerships Amplify Growth Momentum

TSMC’s central role in the AI chip supply chain is bolstered by strategic collaborations with OpenAI, Oracle, Broadcom, and AMD. OpenAI and Oracle’s $300 billion cloud computing deal, deploying 450,000 NVIDIA GB200 GPUs (built on TSMC’s 3nm process and CoWoS advanced packaging), has driven a surge in demand for advanced packaging, expected to contribute 20% to TSMC’s revenue growth by 2026. OpenAI’s $10 billion AI chip partnership with Broadcom has further increased 3nm orders, reinforcing TSMC’s dominance in hyperscale cloud computing. Additionally, AMD’s collaboration with OpenAI and Oracle’s deployment of AMD MI450 chips (using TSMC’s 3nm/2nm processes) have amplified TSMC’s capacity utilization through AMD’s orders.

These partnerships create a virtuous cycle, ensuring TSMC continues to benefit from the AI boom. From its short-term financial performance to its long-term technological and market leadership, TSMC demonstrates unmatched investment value. For investors bullish on the long-term growth of AI and the tech industry, TSMC stands out as a must-watch, high-quality asset.

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