TSM Smashes Records as AI Chip Demand Soars

Taiwan Semiconductor Manufacturing (TSM) reported its sixth consecutive quarter of record profit, with net income surging 69% to NT$763.1 billion (about $23.9 billion). Revenue exceeded management's guidance, driven by high-performance computing, which made up 68% of sales. As the world's largest contract chipmaker, TSMC produces advanced processors for tech giants like Nvidia and Apple, benefiting from the AI boom.

During the ramp-up of its new 2-nanometer process, gross margin dipped slightly, but operating margin came in at 58.7%, beating guidance of 58%. This demonstrates TSMC's incredible pricing power, as AI customers have few alternative foundries. The company also announced plans to invest $265 billion in Arizona and is considering Texas for further expansion, funded by strong free cash flow, which jumped nearly 66% in the third quarter.

However, the broader AI stock selloff pressured TSMC shares, which fell over 1% in pre-market trading. This selloff was triggered by concerns over AI credit and valuation, exemplified by CoreWeave's (CRWV) 15% drop on Wednesday after its bond yields spiked to 15%. Other chip stocks like Nvidia (NVDA), Broadcom (AVGO), and Intel (INTC) also closed more than 3% lower.

In the smartphone market, global shipments fell 22% year-over-year in Q3, with China down 15.4%. Apple's shipments declined 4.3%, but its market share rose to 22.4%. AI data centers are consuming memory supply, driving up phone prices and causing consumers to delay purchases. This memory scarcity benefits suppliers like Micron (MU) and Samsung, but could hurt device makers.

Rocket Lab (RKLB) saw its stock dive 10% after delaying its Neutron rocket's first flight to 2027. Neutron is a reusable medium-lift rocket that would allow Rocket Lab to bid for larger contracts. Each delay pushes potential revenue further out, though analysts remain optimistic about the long-term risk/reward. Meanwhile, Prologis (PLD) and Interactive Brokers (IBKR) are set to report earnings today.

TSMC's record profit underscores its dominant position in the AI chip supply chain. The company's ability to maintain high margins during a process transition highlights its pricing power and technological leadership. As AI demand continues to grow, TSMC is well-positioned to benefit, making its stock attractive despite short-term market volatility.

The broader AI selloff, driven by credit concerns and valuation worries, presents a buying opportunity for long-term investors. CoreWeave's debt surge and bond yield spike have raised red flags about the sustainability of AI infrastructure spending. However, TSMC's strong fundamentals and cash flow generation suggest it can weather any downturn and continue investing in capacity.

The smartphone market weakness, exacerbated by memory supply constraints, is a double-edged sword. While it hurts device makers like Apple, it benefits memory suppliers. Investors should monitor memory pricing as a key indicator; if prices remain high, it could lead to lower volumes in the future, impacting both suppliers and their customers.

Rocket Lab's delay is a setback, but the company's transparent communication and long-term potential in the space launch market keep it a speculative buy for risk-tolerant investors. The upcoming earnings from Prologis and Interactive Brokers will provide insights into the logistics and brokerage sectors, respectively, and could move those stocks.

Overall, the news highlights the divergent trends in tech: AI and data centers are booming, while consumer electronics like smartphones are struggling. This divergence creates opportunities for savvy stock pickers.