TSMC's Record Quarter Shows AI Demand Still Exceeds Supply

TSMC reported third-quarter revenue of NT$1.494 trillion and net income of NT$763.06 billion, up 50.9% and 68.7% from a year earlier. It was the company's sixth consecutive quarter of record profit, supported by demand for advanced chips used in artificial intelligence systems.

The mix shows how concentrated that strength has become. Three-nanometer products supplied 33% of wafer revenue, while high-performance computing represented 68% of total revenue. Smartphones accounted for 21%, and automotive revenue grew 23% from the prior quarter.

Demand is ahead of capacity

Management said demand continues to exceed available production. TSMC guided fourth-quarter revenue to $52.3 billion to $54.3 billion. At the midpoint, that would be roughly 14% above the third quarter and about 58% higher than a year earlier.

Free cash flow rose to NT$476.56 billion from NT$139.38 billion a year ago. The company plans $60 billion to $64 billion of capital spending this year and expects investment from 2026 through 2028 to run well above the prior three-year period.

Margins carry the cost of expansion

The record profit does not remove execution risk. Gross margin declined 1.3 percentage points sequentially to 66.4% as TSMC ramped 2-nanometer production. Management also expects overseas manufacturing to reduce gross margin by three to four percentage points over the next few years.

Those costs are the price of adding capacity and reducing geographic concentration. The second Arizona fab is under construction, with tool installation underway and production expected in the third quarter of 2027.

For investors, the quarter confirms that AI infrastructure demand remains stronger than TSMC can immediately supply. The central question is not whether orders exist, but how efficiently the company can convert a larger global footprint into output. If advanced-node utilization stays high, pricing and volume can offset part of the margin drag. If demand cools while new fabs ramp, the same spending program would become a heavier burden.