Strong AI demand pushes TSM.US (TSM.US) performance to exceed expectations, Wall Street has raised the target price as high as $600

The Zhitong Finance App learned that the results for the third quarter of 2026 and the fourth quarter guidance announced by TSM.US, the world's largest wafer foundry, both exceeded market expectations, further mitigating investors' concerns about the slowdown in artificial intelligence (AI) infrastructure investment. TSMC management said that there are currently no signs of AI demand cooling down, and customer demand for advanced process chips still far exceeds the company's supply capacity.

Strong growth prospects prompted Wall Street institutions such as Needham and Susquehanna to raise their target prices, while Bernstein reaffirmed the “outperforming the market” rating and maintained the target price of 554 dollars.

According to a research report released by Bernstein on October 15, TSMC's third-quarter revenue reached NT$1.494 trillion, up 17.6% month-on-month, higher than market expectations of NT$1.473 trillion; net profit was NT$763.1 billion, up 8% month-on-month, which also exceeded market expectations. Earnings per share reached NT$29.43, higher than market expectations of NT$28.91.

However, TSMC's gross margin for the third quarter fell from 67.7% in the previous quarter to 66.4%, slightly lower than market expectations of 67.1% due to a decline in 2nm advanced production capacity and overseas expansion. The operating margin also fell from 60.3% to 58.7%.

Despite declining profit margins, Bernstein believes that TSMC's performance still shows strong market demand and excellent execution capabilities. Short-term gross margin pressure is partly due to higher than expected production capacity climbing costs brought about by demand for the 2 nm process.

What is even more exciting for the market is TSMC's outlook for future growth. The company expects revenue for the fourth quarter to reach $52.3 billion to $54.3 billion, far higher than the market's general expectation of about US$50.5 billion previously. According to the guideline's median calculation, fourth-quarter revenue is expected to increase by about 14% month-on-month, which is significantly stronger than normal seasonal performance.

Meanwhile, TSMC raised its US dollar revenue growth forecast for the full year 2026 to 44% from slightly higher than 40%, indicating that demand for AI chips continues to accelerate the company's performance growth.

AI demand still far exceeds supply capacity, advanced manufacturing processes accelerate production expansion

TSMC CEO Wei Zhejia said in an earnings conference call that there is currently no sign of a slowdown in AI demand. Wedbush analyst Matt Bryson pointed out that TSMC management described the current AI demand as “extremely strong,” and said that the company not only continues to communicate with customers, but also sends a special team to inspect the US data center construction progress and power supply situation to assess the sustainability of AI infrastructure expansion.

According to TSMC's survey results, related construction is currently progressing smoothly, and customer demand is still significantly higher than the production capacity the company can provide.

Notably, TSMC previously predicted that the compound annual growth rate of AI accelerator-related revenue from 2024 to 2029 will reach the high to 50% level. This time, management further stated that the actual growth rate may be higher than previously forecast.

Needham analyst Charles Shi believes that this statement means that the AI chip market still has the potential to grow beyond current expectations. In addition to AI accelerators, TSMC also placed special emphasis on growing demand for central processing units (CPUs) and network chips.

Bernstein pointed out that the popularity of AI agents and open source models is improving the efficiency of AI applications and lowering the threshold for enterprises to adopt AI technology, thereby driving the expansion of demand for advanced manufacturing processes. At the same time, the CPU computing power required for AI agents, as well as the ever-growing demand for network connectivity between data centers, are also becoming a new driving force for growth.

Looking at business performance in the third quarter, TSMC's high-performance computing (HPC) business revenue increased 22% month-on-month, smartphone business grew 10%, IoT business grew 5%, and automotive electronics business grew 23%.

According to Bernstein's data, the revenue of the high-performance computing business reached about 32 billion US dollars in the third quarter, accounting for 68% of the company's total revenue, while the smartphone business's share of revenue has fallen to 21%, highlighting that AI and high-performance computing are increasingly becoming TSMC's most important growth engines.

2nm production capacity is expected to double capital expenditure or further increase next year

TSMC is speeding up the expansion of global production capacity in the face of increasing demand for advanced manufacturing processes. Susquehanna analyst Mehdi Hosseini pointed out that TSMC expects the annual production capacity of the 2-nm process to more than double in 2027.

According to the Bernstein Research Report, the 2 nm process contributed about 8% of TSMC's wafer revenue in the third quarter, reflecting that this latest process is rapidly entering the commercialization phase. In terms of the 3-nm process, TSMC plans to add four new fabs, two of which are located in Taiwan, China, one in the US, and the other in Japan.

Susquehanna pointed out that TSMC will also add a 3 nm fab plant in Tainan, Taiwan, and is expected to enter mass production in the first half of 2028. In addition, another plant is already scheduled to be put into operation in the first half of 2027.

US expansion plans are also progressing at an accelerated pace. TSMC's second fab in Arizona is expected to begin mass production in the third quarter of 2027, slightly earlier than previously scheduled. Meanwhile, the company is evaluating the construction of a new production site in Texas.

In terms of more advanced process technology, TSMC's A14 process plans to start risky trial production in 2027 and enter mass production in 2028. Susquehanna said that the current early development of the process is progressing even faster than the same period of the 2 nm process.

Advanced packaging technology also continues to break through. TSMC currently has advanced package production capacity of five times the mask size, and is moving towards larger package specifications of nine times and fourteen times the mask size to meet the demand for higher computing power and larger package area for future AI chips.

In terms of capital expenditure, TSMC maintained its 2026 investment plan of 60 billion to 64 billion US dollars, but management emphasized that capital expenditure from 2026 to 2028 will increase significantly compared to the past three years, and the increase may expand further.

Needham expects TSMC's capital expenditure to reach 90 billion US dollars in 2027 and further increase to 100 billion US dollars in 2028 to support additional 3 nm production capacity and potential expansion plans in Texas.

Bernstein believes that although capital expenditure continues to rise, TSMC's capital expenditure as a share of revenue is expected to gradually decline as revenue growth accelerates. Additionally, the Bernstein Research Report also mentioned discussions between TSMC and Tesla (TSLA.US) CEO Musk about the Terafab fab. TSMC confirmed that the two parties had communicated, but emphasized that the fab must be operated by TSMC itself. Based on this, Bernstein judged that it may be difficult for the two sides to reach a cooperation agreement, but it is still unclear whether the evaluation of the new plant in Texas is related to this project.

Wall Street raised its target price as high as $600

Strong performance and prospects for expanding production have prompted many Wall Street institutions to be more optimistic about TSMC.

Needham maintained TSMC's “buy” rating and raised the price target from $530 to $560. The bank's analyst Charles Shi said that 2027 could be an important year for TSMC to set a new revenue record while maintaining rapid growth.

Susquehanna drastically raised TSMC's target price from $430 to $600. The bank believes that the expansion of 2 nm and 3 nm production capacity, the upgrading of advanced packaging technology, and the acceleration of US production base construction will further strengthen TSMC's competitive advantage in the global advanced foundry market.

Wedbush also reiterated the “outperform the market” rating, believing that TSMC's judgment on AI demand is highly credible. In particular, the company has included data center power, memory chips, and other potential supply chain bottlenecks in the needs assessment.

Bernstein, on the other hand, maintained TSMC's target price of 554 US dollars and a “outperforming the market” rating. Corresponding to its stock price of about 430 US dollars on October 15, there is still room for about 29% increase. At the same time, the bank maintained a target price of NT$3,300 for TSMC shares. Compared with the closing price of NT$2,440 on the same day, there is a potential increase of about 35%.

Bernstein expects TSMC's earnings per share to reach $17.18 in 2026 and grow further to $22.48 in 2027. The bank pointed out that compared with three months ago, the demand environment faced by TSMC has improved markedly, and the company continues to respond to customer needs through careful expansion of production and efficient execution, which is expected to drive long-term compound profit growth.

However, not all organizations are equally optimistic about TSMC's future.

Jeff Pu, an analyst at GF Securities, believes that TSMC's overall third-quarter results were between in line with expectations and slightly below expectations, so it maintained a “holding” rating. The bank expects TSMC's revenue to increase 39% year-on-year in 2027, driven by continued growth in demand for AI accelerators, CPUs and network chips, and moderate price increases for advanced and mature manufacturing processes.

However, the bank also warned that the 2 nm and A14 process production capacity climbing, overseas expansion, and rising equipment costs may offset some of the profit margin improvements brought about by revenue growth, and keep TSMC's overall gross margin relatively stable from 2027 to 2028.

Furthermore, GF Securities believes that Intel's (INTC.US) eMiB-T advanced packaging technology still competes with TSMC's CoWOS technology.

Notably, despite TSMC's strong earnings report and raising its full-year growth forecast, its US stock fell more than 2% in early Thursday trading, reflecting investors' concerns about the AI industry's valuation, capital expenditure, and potential return on investment. Intel and GFS.US (GFS.US) shares also both fell by more than 2%, indicating that the semiconductor sector is under overall pressure.

However, Bernstein believes that the signal released by TSMC's latest performance is still clear: AI infrastructure construction has yet to slow significantly, demand for advanced processes continues to exceed supply, and TSMC is consolidating its central position in the global AI chip supply chain through continuous expansion of production.