Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) has delivered the kind of earnings report that makes an earlier worry look rather different. Its transition to two-nanometer manufacturing has begun to squeeze margins, and yet third-quarter net income and diluted EPS both grew 68.7%, and the company’s forecast points to another substantial increase in sales before the year is over. The question that investors need to think about is not whether the company’s newest technology carries costs but rather whether those costs are a reasonable price for the growth TSMC is producing.
Yahoo Finance’s latest available valuation statistics place the stock’s shares at 21.41 times forward earnings. Investors assessing that valuation now have stronger earnings and guidance to consider.
In other news, we meticulously compiled a list of the best big name stocks to buy according to financial media, and there are nine stocks other than AMAT that rank on that list. Find the list here.
Bull Case
Revenue reached NT$1.49 trillion in the September quarter, up 50.9% from a year earlier, while net profit increased 68.7% to NT$763.06 billion. The company also reported that operating income rose 75%. Growth of that magnitude would be notable on its own, but TSMC also exceeded the top of its previous US-dollar revenue guidance, which was $46.72 billion against a forecast range of $44.6 billion to $45.8 billion.
The source of demand is visible in the manufacturing mix. Chips made using seven-nanometer or more advanced technologies contributed 79% of wafer revenue. Two-nanometer technology already represented 8%, up from just 3% three months earlier, and high-performance computing accounted for 68% of total revenue. Read more extensively about TSMC’s bull and bear case here.
The numbers suggest that Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is not merely promising investors benefits from an eventual AI payoff. Customers are already paying for more leading-edge production, and that business is generating formidable operating profits. Cash generation confirms the strength, as the company reported that net cash generated from operating activities totaled NT$919.77 billion in fiscal Q3, and free cash flow rose to NT$476.56 billion. Which other big name stocks does the financial media favor? Access our complete list here for free.
Management’s fourth-quarter outlook also raises the bar. Revenue is forecast at $52.3 billion to $54.3 billion, compared with $46.72 billion just reported. That is management guidance rather than guaranteed growth, but it suggests current manufacturing demand remains strong enough to support another sizeable sequential increase. We also shortlisted the best healthcare stocks to buy according to hedge funds. Check out the complete list here to make an informed decision.
Bear Case
There is a cost to the company’s technological progress. Gross margin slipped 1.3 percentage points from the June quarter to 66.4%, primarily because of the initial two-nanometer ramp, according to TSMC. It also reported that operating margin for the quarter was 58.7%, down 1.6 percentage points compared to fiscal Q2 2026. Although the decline is not evidence that demand has weakened, it does demonstrate that rising sales do not automatically produce rising profit margins. In other news, an ex-Google researcher said AI could “Kill Us All”. Should Alphabet investors care? Read here.
Although TSMC’s latest gross margin remained inside its earlier guidance range, the company expects the same 65%–67% range next quarter. Operating margin is forecast at 56.5%–58.5%, below the 58.7% delivered in September. Those expectations complicate the idea that today’s exceptionally high profitability can simply continue expanding.
Nor is the growth cheap to finance. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) spent $13.84 billion on capital expenditures in the third quarter, bringing the nine-month total to $40.64 billion. High-performance computing now contributes more than two-thirds of sales, and North American customers account for 79% of revenue by customer location. Both figures underline how much the company’s future results depend on sustained demand from its largest markets.
Conclusion
Today’s earnings make the case for TSMC’s growth stronger, not simpler. The two-nanometer transition is already weighing on margins, but profits, cash generation and the next-quarter revenue outlook remain powerful. At the dated 21.41-times forward multiple, the argument for the shares rests less on avoiding margin pressure than on earning enough from advanced manufacturing to absorb it. The next test is whether that trade-off keeps working as capacity expands.
READ NEXT: Can Eli Lilly Catch Novo Nordisk in the Oral GLP-1 Race? AND Abbott vs. Intuitive Surgical: Is Consistent Growth Better Than Premium Growth?
This article is originally published at Insider Monkey.
Hedge Fund Resource Center