To The Moon

$Taiwan Semiconductor Manufacturing(TSM)$

After a stunning rally that made it one of the most valuable companies in Asia, Taiwan Semiconductor Manufacturing Co. (TSMC) is back in focus ahead of its third-quarter earnings on October 16. The world’s largest contract chipmaker — and the backbone of the global semiconductor supply chain — faces a delicate balancing act this quarter: sustaining explosive AI-driven demand while grappling with persistent capacity constraints in 3-nanometer (3nm) production and advanced packaging technologies.

Following a sharp 6% selloff to $280 on Friday, investors are asking the same question — was this a healthy pullback or the start of a deeper correction? The answer may hinge on how well TSMC reassures the market about its earnings trajectory, margin outlook, and ability to meet insatiable AI chip demand from customers like Nvidia, Apple, and AMD.

A Quarter of Cautious Optimism

Expectations are high. Analysts broadly forecast revenue growth of around 8–10% quarter-over-quarter, driven by surging orders for AI accelerators, data center GPUs, and next-generation smartphone processors. TSMC’s 3nm and 5nm process nodes remain the most sought-after in the world, and with Apple’s iPhone 16 and Nvidia’s Blackwell GPU ramping up production, demand continues to outpace supply.

However, management faces a challenging narrative: while AI orders are booming, other semiconductor segments remain sluggish. The PC, smartphone, and consumer electronics markets — which together make up over 40% of TSMC’s revenue base — are only slowly recovering from a multi-year inventory correction.

The key question for investors is whether AI-related demand can fully offset softness elsewhere.

The AI Supercycle: Still in Its Early Innings

The AI wave is not a passing trend — and TSMC is arguably the biggest structural winner of this technological transition. Every leading AI processor in production today, from Nvidia’s H100 to AMD’s MI300 and Apple’s Neural Engine chips, relies heavily on TSMC’s most advanced process nodes.

In Q3, the company is expected to post record high utilization rates at its 5nm and 3nm facilities. Analysts at Bernstein estimate that AI-related chips now account for over 15% of total wafer revenue, up from just 6% a year ago.

Still, the company has been careful to manage expectations. CEO C.C. Wei previously cautioned that “AI demand will grow exponentially over the next several years, but it cannot offset all cyclical headwinds immediately.”

In other words, AI is indeed a long-term growth driver — but near-term earnings volatility remains possible.

Advanced Packaging: The Bottleneck That Won’t Go Away

Even with unprecedented AI demand, TSMC’s biggest challenge right now isn’t orders — it’s capacity. Specifically, the company is struggling to keep up with demand for CoWoS (Chip-on-Wafer-on-Substrate), its advanced packaging technology critical to high-performance AI accelerators.

CoWoS capacity is believed to be fully booked through 2025, with customers scrambling to secure allocation. TSMC has pledged to double its CoWoS output capacity by late 2025, but in the near term, shortages may limit upside potential in AI-related revenue.

This supply bottleneck has led to a queue of backlogged orders, particularly from Nvidia, which relies almost exclusively on TSMC for the packaging of its flagship data center GPUs.

If TSMC provides clear visibility on how quickly these capacity expansions are progressing — especially at its new facilities in Taichung and Hsinchu — investors could regain confidence that the bottleneck will ease by next year.

Margins Under the Microscope

Another focal point for investors this quarter will be gross margin performance. In Q2, TSMC posted a gross margin of 53.1%, slightly below expectations, as rising costs from new fabs in Arizona and Japan, plus R&D expenses for next-generation process nodes, weighed on profitability.

For Q3, analysts expect margins to remain flat or modestly improve to around 53.5–54%, driven by stronger product mix from advanced nodes and improving utilization rates.

However, the company faces headwinds from a strengthening Taiwan dollar, as well as higher depreciation and electricity costs linked to fab expansions. CFO Wendell Huang has previously noted that margins could fluctuate near-term as the company invests aggressively in new capacity, with the long-term goal of maintaining a “mid-50s” gross margin profile once scale efficiencies return.

Investors will want reassurance that the current expansion spree — particularly the Arizona Fab and the upcoming 2nm facility in Hsinchu — won’t erode returns on invested capital in the near term.

The Stock: Healthy Pullback or Warning Sign?

TSMC’s 6% drop to $280 on Friday — its steepest one-day fall since April — reflects the market’s growing nervousness about the sector’s valuations. After rallying more than 70% year-to-date, the stock had been priced for perfection.

The selloff was triggered by broader market jitters over U.S.-China trade tensions and concerns about potential export restrictions on advanced semiconductor equipment. But fundamentally, TSMC remains one of the most profitable and strategically vital players in the global tech ecosystem.

At its current level, TSMC trades at roughly 23x forward earnings, near the mid-range of its five-year average. That’s not cheap, but not excessively priced either, given the company’s dominant market position and structural tailwinds from AI, automotive semiconductors, and high-performance computing.

For long-term investors, this pullback may represent an opportunity — provided Q3 results confirm that TSMC’s growth engine remains intact.

Key Metrics to Watch on October 16

1. Revenue Growth: Analysts expect around NT$620–640 billion, driven by 3nm ramp and AI chip demand.

2. Gross Margin: Projected in the 53–54% range; any deviation will signal cost pressures.

3. CapEx Outlook: Investors want clarity on 2025 spending plans, especially for CoWoS and 2nm expansion.

4. AI Segment Commentary: Updates on Nvidia and AMD order visibility will be closely scrutinized.

5. Geopolitical Exposure: Any mention of U.S.-China policy shifts or export curbs could influence guidance.

Longer-Term Outlook: The 2nm Horizon

Beyond near-term earnings, TSMC’s 2nm process technology — set for mass production in late 2025 — represents the next major leap in chip performance and efficiency. Early indications suggest strong interest from Apple and Nvidia, positioning TSMC to maintain its technological lead over rivals like Samsung and Intel Foundry Services.

If successful, 2nm will further entrench TSMC’s dominance in the high-end semiconductor supply chain, making it virtually indispensable in the AI, data center, and mobile computing ecosystems.

However, execution risk remains high. Delays in 2nm rollout, equipment shortages, or geopolitical disruptions in Taiwan could weigh heavily on future profitability.

Verdict: Accumulate Selectively, but Brace for Volatility

At $280, TSMC is back near its mid-summer support zone. For investors with a long-term horizon, the recent dip could be an attractive entry point — but near-term volatility should not be underestimated.

The Q3 report will likely confirm robust AI-driven momentum but may also highlight lingering constraints in packaging capacity and margin pressures from expansion costs. In short: strong fundamentals, short-term growing pains.

If management provides upbeat guidance for Q4 and early 2025 — particularly around CoWoS capacity relief and 2nm progress — the stock could quickly recover lost ground. Conversely, a cautious tone or margin miss could extend the correction into late October.

Entry Zone: $270–$285 (accumulation range for long-term investors) Verdict: Cautious Buy — AI tailwinds intact, but expect near-term volatility.

Final Takeaway

TSMC remains the beating heart of the AI hardware revolution. Despite cyclical fluctuations and supply constraints, its technological lead, scale, and customer base are unmatched. The upcoming earnings will be more than a quarterly report — it’s a referendum on whether the AI supercycle can continue powering the semiconductor sector through a high-cost, high-demand environment.

For now, the question isn’t whether TSMC can deliver — it’s how much longer it can stay ahead of the world.