TSMC Q3 Revenue Accelerates: Top AI Chip Stock to Buy

Taiwan Semiconductor Manufacturing Company (TSM) reported September revenue of NT$512 billion, up 55% year over year. For the full third quarter, revenue reached NT$1.49 trillion, up 51% in local currency. However, the New Taiwan dollar weakened against the U.S. dollar over the past year, which inflated those growth rates. At an exchange rate of 32 NTD to USD, Q3 revenue was about $46.7 billion, up 41% from a year ago and accelerating from 34% growth in the second quarter.

That result topped both analysts' expectations and TSMC's own guidance range of $44.6 billion to $45.8 billion. Management had also forecast gross margin between 65% and 67% and operating margin between 56% and 58%, both slightly down from Q2 but still near record levels. Full earnings results will be released next week.

Several factors drove the strong revenue growth. First, robust demand for AI-related chips continues, as chip designers rely on TSMC's advanced manufacturing. Second, TSMC quickly ramped up its 2-nanometer (2nm) production process last quarter. The technology accounted for just 3% of revenue in Q2 but is expected to climb rapidly. While the new node could pressure margins initially, TSMC is reportedly charging premium pricing, and faster tooling utilization should offset much of that pressure.

Beyond 2nm, pricing is well above existing processes. Management reportedly raised prices at the start of the year for most chips and plans to continue annual price increases through at least 2029, with a 10% hike expected early next year. Finally, TSMC's massive capacity increases—funded by heavy capital expenditure—have enabled it to bring more capacity online, including an accelerated 2nm build-out for 2026. The company plans to spend hundreds of billions on new facilities in Arizona and is exploring building in Texas to diversify geopolitical risk.

TSMC's accelerating revenue growth is a clear signal that the AI spending boom is not slowing down. As the world's largest third-party chip manufacturer, TSMC is the backbone of the AI supply chain. Its ability to beat guidance and raise expectations suggests that demand for advanced chips remains robust, which bodes well for the entire semiconductor ecosystem.

The successful ramp of 2nm production is particularly important. This technology will be used in the next generation of AI chips, smartphones, and data center processors. TSMC's early lead in 2nm gives it a competitive advantage over rivals like Samsung and Intel, and premium pricing for this node should support profitability even as depreciation costs rise.

TSMC's wide moat is a key part of the investment case. The company's virtuous cycle—large revenue funding massive R&D and capacity investments—ensures its technology remains best-in-class. Importantly, TSMC is relatively agnostic about who designs the chips it makes. While Nvidia currently dominates AI chip design, custom silicon from hyperscalers is growing. Regardless of the designer, TSMC is likely to manufacture the chips, giving it a resilient business model.

Management's long-term outlook of 25% average annualized sales growth from 2024 to 2029 looks achievable, and CEO C.C. Wei hinted that this target could be raised again. With the stock trading at just 27 times earnings, TSMC appears undervalued relative to its growth prospects. Earnings growth should significantly outpace revenue growth thanks to price increases protected by its wide moat.