TSMC Earnings Smashed Expectations Again, But Here's One Thing That May Disappoint AI Bulls

ASML's gloomy outlook still weighs on the market, but TSMC came to save the day. With the launch of iPhone 16 and continued AI growth, the world's largest chipmaker's earnings once again exceeded expectations. The company also anticipates strong Q4 growth, driven by the iPhone and servers.

Key Results:

Revenue: $23.5 billion, a 36% YoY increase (39% in TWD terms), and a 13% QoQ growth, surpassing prior guidance of $22.4-23.2 billion.

Net Income: $9.406 billion, up 26% YoY (28% in TWD terms), or $1.94 per share.

Thanks to the iPhone 16's September launch, rising demand for high-end AI chips, and price increases, TSMC's gross margin reached an impressive 57.8%, up 4.6 percentage points from the previous quarter and 3.5 points YoY—a historical high. The company's pricing power is clearly strong.

iPhone 16 Drives 3nm Revenue Share Above 20% for the First Time

TSMC's 3nm chip revenue accounted for 20% this quarter, up 5 percentage points QoQ, largely due to the AI-powered iPhone 16 series release. This time, the entire iPhone 16 lineup uses 3nm technology, whereas only the Pro/Pro Max models of iPhone 15 did. Research shows iPhone ranked first in global smartphone sales in September, with shipments up 1% YoY and a 16% market share, mainly due to the latest iPhone. Moving into October, with Apple officially launching its AI service (Apple Intelligence), iPhone 16 sales may increase further. The global smartphone market is gradually recovering.

The rising demand for 3nm chips reduced the 5nm revenue contribution to 32%, a 3-percentage-point decrease QoQ. This process is currently led by NVIDIA's AI chips (like the H100 and Blackwell-based B200, which are already in mass production), maintaining overall demand. As B200 production ramps up, TSMC's business will continue to receive strong support. Revenue contribution from 7nm chips remained flat at 17%.

HPC Chip Contribution Stabilizes at 50%, Smartphones Rebound

Even though Q3 was dominated by smartphones, AI demand remains strong. HPC (High-Performance Computing) chips contributed 51% of revenue this quarter, marking the second consecutive quarter above 50%, with a slight 1-percentage-point decline QoQ. However, HPC chip growth is no longer explosive, which could disappoint AI bulls as the market stabilizes. Smartphone chip revenue contributed 34%, up 1 percentage point QoQ but down 5 points YoY. AI's dominance has somewhat reduced the importance of smartphones to TSMC.

Additionally, IoT chip revenue (for wearables, smart home devices, etc.) and automotive chip revenue contributed 7% and 5%, respectively. Automotive chip revenue remained flat QoQ as global electric vehicle demand stabilizes and grows.

Strong Q4 Growth Expected, Full-Year Guidance Raised Again

For Q4, TSMC expects revenue between $26.1 billion and $26.9 billion, a 35% YoY increase at the midpoint, beating the $24.94 billion expectation. Gross margins are forecast to be in the 57-59% range. This growth will be driven by the iPhone 16's continued momentum (including China's Double 11 shopping event and the North American holiday season) and sustained AI demand, allowing TSMC to achieve both revenue and profit growth.

With such strong demand, TSMC now expects annual sales to grow nearly 30%, up from the previously raised guidance of over 20%. This marks TSMC's third consecutive guidance raise, highlighting robust demand. Additionally, TSMC expects this year's capital expenditures to slightly exceed $30 billion, at the lower end of its previous $30-32 billion guidance.

While generative AI has been a key driver of TSMC's performance, the combination of AI and consumer electronics is fueling a new upgrade cycle, especially with strong initial iPhone 16 orders. This ensures TSMC's continued growth in both consumer and enterprise markets. However, the market's high expectations for AI products could pose some risks. The stabilization of TSMC's HPC chip revenue share suggests that while AI chip demand continues to grow, the explosive phase might be cooling, which could raise some concerns among investors.