TSMC’s Sixth Straight Record Profit Is Real, But Its Margin Is Quietly Shrinking

Taiwan Semiconductor Manufacturing Co. (TSMC) is expected to report record third-quarter net profit of NT$446.3 billion when releasing earnings Thursday, according to an LSEG SmartEstimate based on 16 analysts, cited by Reuters.

This represents a 65% year-over-year increase, driven by demand for AI chipmaking capacity and TSMC’s advanced CoWoS packaging technology.

The company confirmed record quarterly revenue of NT$1.49 trillion on October 8, a 50% year-over-year increase exceeding its guidance.

TSMC’s $2.1 trillion market cap nearly doubles Samsung Electronics, which also posts record profits from the same surging AI demand. 

A Record Profit With a Smaller Slice Attached

Combining expected profit and reported revenue yields an implied net margin of around 50%, down from Q2’s 55.62%, as TIKR’s detailed analysis notes. 

Part of this gap stems from a one-time event: Q2 profit included NT$63.2 billion in gains from selling an 8.1% stake in Vanguard International Semiconductor,  a windfall that won’t recur. 

The other driver is structural. TSMC’s 2-nanometer node, projected to dilute H2 gross margin by 3 to 4 percentage points, carries usual new-process costs: lower early yields and heavier initial depreciation, before volume production catches up. 

Analyst consensus does not expect Q2’s peak margins to return, projecting net margins to stabilize between 50% and 51% through Q3 2027, a year chipmaker SK Hynix’s CEO warns will bring the memory industry’s worst supply crunch. 

The Record Profit Is Funding an Even Bigger Bill

The other half of this story is spending. TSMC’s 2025 capex of $40.54 billion outpaced its typical $29-to-$35 billion annual range from 2021 to 2024. 

Meanwhile, its 2026 guidance of $60-to-$64 billion, raised in July from $52-to-$56 billion, represents a 48% to 58% year-over-year jump, TIKR notes.

That money flows overwhelmingly to equipment suppliers like ASML, which also partners with TSMC in a photomasks initiative, meaning TSMC pours its record profits back into advanced chipmaking tools instead of holding cash for investors. 

TIKR notes, Morgan Stanley’s Charlie Chan expects TSMC to raise full-year revenue growth guidance into the low-to-mid 40% range on Thursday, a signal investors will likely value over the profit record itself.

The Real Test Isn’t the Number, It’s the Guidance

While a sixth consecutive record quarter sounds impressive, investors have already priced it in; TSMC stock is up 63% this year alongside Taiwan’s broader 69% market gain, so simply hitting targets won’t boost the stock much further. 

What matters Thursday is Q4 margin guidance. Having targeted a 65-67% gross margin for Q3 despite 2nm startup costs, holding that same level into Q4 shows TSMC can handle those expenses. A drop into the low 60s would prove margin pressure is getting worse. 

Analysts remain split on whether TSMC needs a Texas facility beyond its existing Arizona buildout, citing potential space constraints within five years against the reality that several planned Arizona fabs have yet to break ground.

Either way, the headline record masks a deeper reality: TSMC is earning more than ever, keeping a smaller share of every dollar, and reinvesting profits faster than at any point in its history.

Sources:

Reuters: TSMC expected to report sixth straight quarter of record profit thanks to AI boom

TIKR: TSMC’s Q3 Earnings Preview: 65% Profit Growth, But Net Margin Seen Slipping to 50%