A glimmer of hope amid the AI winter? TSMC (TSM.US) power orders are fully booked and price hikes are on the way—"self-sustaining capability" offsets financing cost risks

In the same week that global AI stocks took a hit due to inflation and interest rate hike expectations, TSMC (TSM.US) delivered an almost flawless earnings report.

According to Zhihui Finance APP, TSMC announced its third quarter 2026 financial results on Thursday: consolidated revenue reached NT$1.4942 trillion (US$46.72 billion), up 50.9% year-on-year and 17.6% quarter-on-quarter, exceeding the company’s own guidance range of US$44.6-45.8 billion; net profit attributable to the parent was NT$763.06 billion, up 68.7% year-on-year and 8.0% quarter-on-quarter, marking the sixth consecutive quarter of record single-quarter profits and the eleventh straight quarter of profit growth; diluted earnings per share was NT$29.43, higher than the market estimate of about NT$28.3 and also above the weighted expectation of 16 analysts polled by LSEG (net profit expectation NT$746.3 billion). Guidance for fourth quarter revenue is US$52.3-54.3 billion—its midpoint is about 14% higher than Q3, far above market estimates of US$50.35 billion.

For today’s AI semiconductor market, the significance of this earnings report goes far beyond the numbers. As the exclusive foundry for Nvidia and Apple’s most advanced chips, and the “global chip manufacturing hub” that Nvidia, AMD, and Google depend on to turn cutting-edge designs into physical components, TSMC stands right at the center of the market’s AI narrative.

Revenue side: Compute demand remains hot, price hikes on the way

By process node, the most advanced 2nm shipments accounted for 8% of third quarter wafer sales (3% last quarter), 3nm accounted for 33%, 5nm for 28%, and 7nm for 10%. Advanced processes (7nm and below) combined for 79%—the volume and price increases in advanced nodes were the core drivers for revenue beats.

The slope of monthly revenue growth illustrates the case: July up 44.7% YoY, August up 53.3%, September up 54.6% (to NT$511.86 billion), with the pace accelerating each month. Bank of America Securities noted that the ramp-up in 2nm was driven by stronger-than-expected demand for Apple’s new SoC and AMD’s server CPUs, combined with Nvidia’s Rubin GPU, AMD’s MI400, AWS’s Trainium3 and several other accelerators migrating to 3nm. Utilization for 5nm and 3nm remained above 100%.

Visibility of demand is also being extended. Bank of America states TSMC’s 2nm order visibility now stretches to 2028, and forecasts that by Q3 2028, advanced process wafer monthly supply and demand will exceed 500,000 units, with utilization rates reaching as high as 105%. J.P. Morgan believes tight supply for advanced processes may persist through 2028. Chairman Mark Liu already admitted during the July earnings call that advanced packaging capacity is extremely tight and is even limiting customer growth.

The issue of price hikes has also become clearer. Analysis indicates reports pointing to a 3%-6% increase in wafer prices; Morgan Stanley and Yuanta Investment Consulting estimate there’s still room for a 5%-10% increase in advanced process wafer prices by 2027. Gokul Hariharan, J.P. Morgan Taiwan Research Head, believes that this quarter’s gross margin nearing the high end of guidance is precisely supported by high 3nm/5nm utilization and rising foundry prices.

Cost side: Gross margin still under pressure during the strongest expansion cycle in history

The strong revenue is effectively paying for dilution on the cost side. Third quarter gross margin was 66.4%, within guidance of 65%-67%, but down 1.3 percentage points from 67.7% last quarter—the visible impact of ramping 2nm; operating margin was 58.7%, exceeding the top end of guidance.

Market expectations are that the 2nm ramp may dilute gross margin by about 3-4 percentage points, while overseas fab expansions could create an additional 2-3 percentage points of impact. TSMC’s expansion is unprecedented: Capex this year will reach US$60-64 billion (raised from US$52-56 billion in the July earnings call, with about 70%-80% going toward advanced processes), a company record; at present, about 20 fab projects are being built and equipped simultaneously—a brand new pace for a company accustomed to handling 4-5 new fabs at a time. Overseas, aside from US$26.5 billion in Arizona (including a US$10 billion addition in July), the company is evaluating a new site in Texas; Elon Musk said last week his company will self-build and run a Terafab AI chip facility, and TSMC may lease part of the site.

For 2027 Capex, sell-side consensus continues to rise: institutional survey averages around US$75 billion, Goldman Sachs targets US$85 billion, UBS US$90 billion (KGI estimates US$70-72 billion; for 2028, UBS expects US$105 billion, J.P. Morgan US$100 billion).

Charles Shum’s point is worth quoting: "The bigger question for Q3 is actually about 2027. TSMC’s Arizona expansion, possible Texas hub, and Terafab negotiations will shape capex and overseas gross margin dilution, while Taiwan media reports point to a 3%-6% wafer price hike. The next-generation A14 process node and advanced packaging updates should also clarify TSMC’s response to Intel’s challenge."

The three main hedges against dilution are price hikes, utilization, and product mix—if advanced processes raise prices 5%-10% as scheduled in 2027, Morgan Stanley and Yuanta forecast gross margin could cross or approach 70%; guidance for Q4 is gross margin 65%-67% and operating income margin 56.5%-58.5%, indicating management still has ample margin control. New Taiwan dollar appreciation is another pressure on gross margin in the second half (per Gokul Hariharan).

Signal for the memory supply chain: CoWoS is the choke point for HBM—the heaviest weight in the AI chill?

TSMC doesn’t make memory chips, but the boom or bust of the global memory industry is strongly tied to its production lines. AI chips must use CoWoS advanced packaging to bind logic chips with HBM, making CoWoS the key indicator for monitoring memory demand—KGI Investment Consulting points out that, driven by HBM4 base dies and strong demand, TSMC’s 3nm capacity will remain tight, and monthly capacity will expand to 160,000/200,000/220,000 wafers by the end of 2026, 2027, 2028, respectively.

This also explains why, after Korean memory stocks tanked on Tuesday (October 13, SK Hynix falling about 10% in one day), the market saw TSMC’s earnings call as “the last hope of the whole village”: the foundry leader’s order flow, pricing and expansion rhythm are ultimately the upstream verification for HBM and the memory supply chain.

The context of this earnings report is the darkest week for the AI sector. On Wednesday (14th), higher-than-expected US September CPI (3.7% YoY) stoked renewed rate hike fears, sending the 30-year US Treasury yield up to 5.63% intraday. AI stocks, which are highly sensitive to rates, suffered across the board: AI cloud service provider CoreWeave fell 15.46% in one day and about 25% month to date; yield on its 2032 bond (coupon 9.625%) rose above 15% and the price plunged below 80 cents, entering “distressed territory,” with 5-year CDS around 881 basis points (compared to 547 at end-June)—the market now prices in a five-year default probability of over 50%. Oracle fell nearly 9%, Dell over 11%, Nebius 10%, Nasdaq 100 index tumbled 2%, and several AI infrastructure stocks lost nearly US$80 billion in market value in a single day. Elon Musk reposted related news, commenting “Scary.”

The issue of financing capacity under soaring US bond yields

In contrast, TSMC's earnings report became the watershed of this debate. CoreWeave’s business model is “borrow to buy Nvidia chips, then rent out compute”—having issued about US$22 billion in bonds and taken US$26 billion in loans, with various financings over US$35 billion this year alone. D.A. Davidson analyst Gil Luria put it bluntly: “If CoreWeave borrows at 9% and the best return it can get is 5%, then it doesn’t matter how much you scale up, it’s meaningless.” By contrast, TSMC is a “orders → revenue → cash flow” positive cycle: six consecutive quarters of record profits, accelerating monthly revenues, order visibility into 2028, and tangible capital investments in 20 new fabs.

After the US September CPI data was released Wednesday, the market’s expectation of another Fed rate hike rose sharply, with “higher-for-longer” rates putting direct pressure on semiconductor valuations. The logic is clear: long-term yields rise → discount rates rise → most rate-sensitive growth and AI hardware stocks come under pressure. At the same time, as US Treasury yields soar, the market is turning its focus to corporate financing costs, not just growth in future orders; for asset-heavy AI hardware companies, the worst scenario is that funding isn’t secured before rates spike.

Upstream proof is also coming in: lithography machine giant ASML said Wednesday that clients have started negotiating for 2029 and 2030 orders, easing worries the AI investment boom is running out of steam. AJ Bell Investment Director Russ Mould pointed out, if TSMC reiterates its capex commitments, it delivers a strong signal to the market—“growth momentum hasn’t yet peaked”—and the Q4 guidance of US$52.3-54.3 billion is exactly that signal.

Of course, TSMC can’t hedge out every risk: if financing costs keep rising, the downstream “debt up front, revenue later” model could fall apart, eventually feeding back into foundry order risk. This is outside the earnings report, determined by interest rates. However, as the global foundry leader, TSMC’s strong cash flow generation means that, despite gross margin pressures, it retains ample financing power.

Market pricing for the leader remains generous: the most valuable company in Asia with a market cap of about US$2 trillion (about twice that of Samsung Electronics) just hit an all-time high among chip stocks at the start of the month, and its Taipei share price is up about 57% for the year (on par with the broader index’s 62% gain). Before the earnings call, foreign investment banks collectively raised target prices: Macquarie NT$4,410, Citigroup NT$4,000, Goldman Sachs and J.P. Morgan NT$3,300, Morgan Stanley NT$3,088; Bank of America raised its ADR target from US$590 to US$620, implying about 37% upside. J.P. Morgan projects demand growth will continue through 2028 and boost revenue by 30% that year; Citigroup’s Laura Chen team is bullish on Nvidia, AMD and other major customers driving TSMC’s AI-related revenue through 2027.