Taiwan Semiconductor Manufacturing Company (NYSE:TSM) has surged 13.14% over the last six months, as of October 15. This compares to a 21.5% return for the Insider Monkey Billionaire Index and 15.74% for the State Street SPDR S&P 500 ETF Trust.
TSMC just had a strong third quarter, with revenue rising 41.2% from a year earlier to $46.7 billion. Net income grew even faster, jumping 68.7%. AI-related chips are driving much of this growth, with high-performance computing accounting for 68% of revenue. The company expects revenue to reach $52.3 billion to $54.3 billion in the fourth quarter and is now forecasting full-year revenue growth of around 44%.
What’s interesting is that demand isn’t coming only from AI accelerators. TSMC is also seeing more demand for CPUs used in AI servers and networking chips. As companies move from chatbots toward AI assistants that can carry out tasks, they may need more computing power. TSMC’s CEO said demand for leading-edge chips remains well above what the company can currently supply. The challenge is no longer just keeping up with demand for today’s chips, but deciding how much capacity to build for the next few years.
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What Gives TSMC Its Edge?
TSMC’s advantage goes beyond having customers such as Nvidia and Apple. Manufacturing advanced chips at scale, with good yields and competitive costs, is extremely difficult. In the third quarter, technologies at 7 nanometers and below accounted for 79% of wafer revenue. Its 2nm process already contributed 8%, and management expects annual capacity for the N2 family to more than double in 2027.
Advanced packaging is becoming just as important. As AI chips grow more complex, customers need ways to connect and package multiple components efficiently. TSMC is already producing large packages at good yields and working on even larger designs. This makes it harder for competitors to win business by matching one process technology alone. Customers need manufacturing capacity and packaging that work together, not just a promising chip design.
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Growth Comes With a Bigger Bill
Taiwan Semiconductor Manufacturing Company plans to spend $60 billion to $64 billion on capital expenditure in 2026, with investment over 2026 to 2028 expected to be significantly higher than in the previous three years. It has also committed another $100 billion to US expansion, bringing its planned US investment to $265 billion, and is evaluating further capacity in Texas. These projects bring production closer to customers, but they are expensive.
The cost is already showing up in margins. Gross margin fell from 67.7% in the second quarter to 66.4% in the third, mainly because of the 2nm ramp. Overseas factories will add further pressure, with management expecting them to reduce gross margin by 3 to 4 percentage points in the latter part of the coming five-year period. TSMC believes revenue growth will outpace capital spending, but that still needs to play out. The company has also warned that price-sensitive consumer markets are under pressure, so not every part of its business is enjoying the AI boom.
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Valuation Analysis
TSMC is trading at 33.67x its trailing earnings and 21.41x its future earnings. The difference indicates that analysts expect the company’s profits to increase considerably in the coming year. That by itself does not mean the stock is cheap. However, considering the near-monopolistic characteristic of the company, those multiples seem reasonable.
There is a good reason for those expectations. Third-quarter net income grew nearly 69% year over year. At 21.41x forward earnings, TSMC doesn’t look unreasonable for a business growing this quickly, especially with a 51.1% net margin in the latest quarter. Its manufacturing lead gives it a way to benefit from AI spending.
But investors have to look beyond the next few quarters. TSMC’s stock weakened even after its latest record results, as the wider chip selloff raised questions about the returns on massive AI infrastructure spending. If customers slow their investment before the new factories reach full production, TSMC could face lower capacity utilization just as its costs rise. That would put pressure on both earnings estimates and the valuation, which would be a double whammy for the stock. The stock’s appeal depends on more than strong demand today. It depends on that demand lasting long enough to justify the investments being made now.
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Conclusion
TSMC is in a good position to gain from AI over the coming several years, and its strengths in manufacturing and packaging are hard to copy. Although the stock looks a great long-term buy, it isn’t a low-hanging fruit anymore. The main point is whether earnings can continue to grow fast enough to make the massive investment in new capacity worthwhile. So far, the figures back up the argument. It will be in the coming years that we will see if TSMC can keep delivering those returns as the business increases in size and becomes more costly to operate.
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Market Sentiment
At the end of the second quarter of 2026, TSM was held by 249 hedge funds whose total stake amounted to approximately $50.48 billion, according to the Insider Monkey database. This represents an increase from the 234 hedge fund holders who collectively had an investment value of about $39.22 billion in the quarter before that.
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This article is originally published at Insider Monkey.
