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TSMC Q3 Earnings: Strong AI Demand Sets the Bar High for Growth

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Key Takeaways

  • TSMC's July-August sales point to Q3 revenues nearing the upper end of its guidance range.
  • TSMC expects robust AI demand and a 2nm ramp to drive growth, with 2026 revenue growth above 40%.
  • TSMC's Q3 EPS estimate rose 10.4% to $4.45. However, higher 2nm costs are expected to dampen margins.

Taiwan Semiconductor Manufacturing Company (TSM - Free Report) or TSMC will release its third-quarter 2026 earnings report this month with a strong revenue trajectory. Robust artificial intelligence demand and the ramp-up of advanced process technologies have supported the company's performance so far this year. TSMC's July and August sales suggest that the company remains on track to meet its third-quarter guidance, while the latest Zacks Consensus Estimate indicates substantial year-over-year growth in both revenues and earnings.

TSMC reported July revenues of NT$467.58 billion, up 44.7% year over year and 5.6% sequentially. August revenues increased another 10.1% sequentially to NT$514.81 billion and rose 53.3% year over year. The two months generated a combined NT$982.39 billion. September revenues have not yet been reported and are scheduled to be announced on Oct. 8.

Q3 Revenue Projection Near Upper End of Guidance

TSMC's third-quarter guidance calls for revenues of $44.6-$45.8 billion, based on an assumed exchange rate of NT$32 per U.S. dollar. This translates into approximately NT$1.427-$1.466 trillion of quarterly revenues. Given the NT$982.39 billion reported in July and August, September revenues of approximately NT$444.8-$483.2 billion would be sufficient to place third-quarter revenues within management's guided range.

The Zacks Consensus Estimate is slightly below the upper end of TSMC's revenue guidance at $45.62 billion, implying 37.8% year-over-year growth. At TSMC's guidance exchange rate, this estimate translates to roughly NT$1.460 trillion.

The consensus estimate projects September revenues of approximately NT$477 billion, or about 7% below August's reported level.

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AI Demand Supports Advanced-Node Growth

TSM earlier expected continued strong demand for leading-edge technologies to contribute to third-quarter performance, including the steep ramp-up of its 2nm technology. On the last reported quarter’s earnings call, management described AI-related demand as "extremely robust" and said cloud service providers and their customers continued to provide strong signals and positive outlooks. TSMC subsequently raised its expectation for 2026 revenue growth to slightly above 40% year over year in U.S.-dollar terms.

The company also sees additional silicon demand emerging from agentic AI. The company noted that the trend is increasing the role of CPUs in AI data centers, in addition to AI accelerators. TSMC expects to benefit from demand across x86, ARM-based and RISC-V architectures, all of which are represented among its customers.

TSMC is responding to the multiyear demand outlook by increasing capacity. Management announced an additional $100 billion investment in Arizona for several more 2nm-and-below logic fabs and advanced packaging facilities, while also planning 13 leading-edge and advanced-packaging fabs in Taiwan over the next several years.

Earnings Estimates Continue to Reflect Strength

The Zacks Consensus Estimate projects third-quarter EPS of $4.45, signaling 52.4% year-over-year growth. The estimate has also moved higher in recent months, rising from $4.03 per share to $4.45, an increase of roughly 10.4%. The upward revision provides another indication that analysts have become more confident in TSMC's near-term earnings prospects.

The current EPS estimate compares favorably with TSMC's second-quarter EPS of $4.31 per ADR unit, reflecting expectations of continued strong earnings growth despite higher costs associated with the advanced-node ramp.

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Margins Remain a Key Watch Point

TSMC expects third-quarter gross margin of 65%-67% and operating margin of 56%-58%, compared with second-quarter gross and operating margins of 67.7% and 60.3%, respectively. The company has cautioned that the steep 2nm ramp will weigh on profitability as the new technology moves into higher-volume production.

Shares Lag Broader Market

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Despite TSMC's strong operating momentum, its share performance has been relatively subdued. Shares declined 4.4% during the June-September quarter against 1.5% growth of the S&P 500. The divergence highlights the elevated expectations surrounding TSMC's upcoming results, particularly as AI-driven demand and the 2nm ramp support strong earnings growth.

Peer Comparison

TSMC's performance in the last reported quarter also compares favorably with major U.S.-traded semiconductor peers. TSMC generated $40.2 billion of revenues in the second quarter, up 33.7% year over year, while Intel's (INTC - Free Report) revenues rose 25% to $16.1 billion. Broadcom (AVGO - Free Report) reported third-quarter fiscal 2026 revenues of $29.6 billion, up 86% year over year, driven by strong AI demand. While Broadcom is benefiting from custom AI accelerators and networking, TSMC's growth is more directly tied to AI accelerators and advanced-node production.

Bottom Line: A Buy Ahead of Earnings

TSMC looks well positioned ahead of its Oct. 15 third-quarter earnings release, supported by robust AI demand, advanced-node growth and strong July-August sales. More importantly, rising earnings expectations suggest that the AI investment cycle is translating into tangible revenue and profit growth rather than remaining a longer-term narrative. With TSMC carrying a Zacks Rank #2 (Buy), the stock offers an attractive earnings setup. While expectations are elevated, sustained AI demand, 2nm expansion and improving earnings momentum provide solid reasons to remain bullish on TSM ahead of the results. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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