As AI Demand Soars, TSMC Beats Forecasts With a 54% Rise in Profits

Taiwan Semiconductor Manufacturing Co. (TSMC) reported a significant profit increase on Thursday, exceeding analysts' expectations due to strong demand in the artificial intelligence (AI) sector. The company's impressive results have fueled optimism about continued growth, positioning TSMC as a key player in the semiconductor industry.

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TSMC, headquartered in Hsinchu, Taiwan, announced that its net income for the third quarter surged by 54.2% year-over-year, reaching NT$325.3 billion ($10.2 billion). This figure surpassed analysts' expectations, who had predicted net income to come in at NT$297.7 billion. The company's substantial profit increase highlights the growing demand for its advanced semiconductor technology, particularly in the AI and smartphone markets.

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TSMC had already reported third-quarter sales growth of 39%, driven by strong demand for its cutting-edge chips. As the main supplier of semiconductors to major tech giants like Apple and Nvidia, TSMC is benefiting from increased orders for its most advanced chips, which are essential in high-performance devices and AI applications.

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Looking ahead to the fourth quarter, TSMC expects even stronger sales growth, supported by ongoing demand for its industry-leading 3nm and 5nm chips. These chips are critical to powering the latest iPhones and high-performance computers, especially those used for AI applications. As a result, TSMC's stock has been on the rise, gaining 11% on Thursday alone and increasing by 101% year-to-date.

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Wendell Huang, TSMC's chief financial officer, commented on the company's strong performance, stating that their business in the third quarter was bolstered by robust demand for both smartphones and AI-related technologies. Huang also expressed confidence that this trend would continue into the fourth quarter, with TSMC’s business being further supported by demand for its advanced semiconductor process technologies.

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TSMC now projects fourth-quarter sales to reach between $26.1 billion and $26.9 billion, representing a potential revenue increase of 10.7% to 14.1% compared to the third quarter. If these estimates are realized, TSMC would surpass consensus forecasts from 25 analysts polled by FactSet, who predicted fourth-quarter revenue of $24.9 billion. The strong sales outlook reflects the company’s ability to capitalize on the growing demand for high-performance chips in AI and other advanced technologies.

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As the world’s largest contract chipmaker, TSMC dominates the global semiconductor market, with 69% of its third-quarter revenue generated from the sale of its most advanced chips. These microchips, defined as those manufactured using a 7nm process or smaller, are at the core of the latest technological advancements. TSMC introduced its 7nm line in 2018, followed by its 5nm line in 2020, and its most advanced 3nm chips in late 2022. These chips are now integral to Apple’s high-end iPhones and various AI-driven applications, further cementing TSMC’s leadership in the industry.

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During the third quarter, TSMC's 3nm chips accounted for 20% of its overall wafer revenue, while its 5nm chips contributed 32%, and 7nm chips made up an additional 17%. The increasing demand for these advanced chips is expected to drive further growth in the company’s revenue as AI and high-performance computing applications continue to expand.

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TSMC also achieved higher profitability in the third quarter, with its gross margins rising to 57.8%, up from 54.3% in the same period last year. The company expects to maintain its strong margins in the fourth quarter, projecting a gross margin range of 57% to 59%. Additionally, TSMC's operating margins improved from 41.7% in the third quarter of 2023 to 47.5% this year. For the fourth quarter, the company anticipates operating margins to remain stable, within a range of 46.5% to 48.5%.

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The positive results have led analysts to express optimism about TSMC’s future performance. JP Morgan analysts, led by Gokul Hariharan, noted that the company’s improved guidance and margin trajectory should drive a strong upward movement in the stock. This comes after concerns about the broader semiconductor market were raised following disappointing results from ASML, another major player in the chip industry. However, TSMC’s ability to outperform expectations has alleviated fears of a slowdown in the semiconductor sector, particularly in the AI space.

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In summary, TSMC’s strong financial results and optimistic outlook for the fourth quarter highlight the continued growth in the semiconductor industry, particularly driven by the rising demand for AI-related technologies. With its advanced chip technology and key partnerships with major tech companies like Apple and Nvidia, TSMC is well-positioned to capitalize on this trend. The company's ability to exceed expectations and maintain strong profitability further solidifies its leadership in the global semiconductor market, making it a critical player in the future of AI and high-performance computing.

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