TSMC Earnings: Insatiable AI Demand Comes From Multiple Customers

Key Morningstar Metrics for Taiwan Semiconductor Manufacturing

• Fair Value Estimate: $310.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Taiwan Semiconductor Manufacturing’s Earnings

Taiwan Semiconductor Manufacturing TSM raised its full-year US dollar revenue growth outlook to the mid-30s from 30% and the lower bound of capital expenditure by 5% to $40 billion. Third-quarter revenue was TWD 990 billion ($33.1 billion), up 6% sequentially. Gross margin grew 84 basis points from the prior quarter to 59.5%.

Why it matters: Strong investments in artificial intelligence and a rebound in mature process nodes support TSMC’s higher full-year outlook. We expect cloud service providers and other customers to ramp up AI spending, which eases TSMC’s exposure to Nvidia NVDA.

• Given OpenAI’s multiple agreements with TSMC’s customers, we model 2026 capex to be $47 billion, up 12% from 2025. We do not expect the full plan of OpenAI to be realized, as we are wary of that company’s cash burn, and there is no way to learn how OpenAI will pay for the chips.
• We only make negligible changes to gross margin forecasts despite higher revenue, as we believe high capex is needed in both Arizona and Taiwan to fully capture AI demand. TSMC will have to spend extra to accelerate 2-nanometer capacity in Arizona.

The bottom line: We hike our fair value estimate for TSMC to $310 per ADR share on better guidance. The stock appears cheap, as we expect demand from AI inference will be long-lasting, potentially more than training AI models

Long view: Management prefers to update AI growth in its January call and reiterated a mid-40s compound annual growth rate from 2024 to 2029. We estimate the 2025-29 CAGR for AI revenue to be about 34%, and expect AI will contribute 46% of revenue by 2029.

Bears say: OpenAI can be a sectorwide risk as it relies on external funds to run. Reuters reported that OpenAI is on track for $13 billion in revenue for 2025, but the annual contract value of announced deals is tens of times larger.