TSMC's Resilience: Can Export Controls Shield It From Nvidia's Volatility?

The semiconductor sector's latest earnings cycle has exposed stark contrasts between two giants, with Nvidia's AI-powered revenue surge colliding with TSMC's steady execution-and diverging policy pressures.

Nvidia's Q3 2025 results showed $57 billion in revenue, surpassing estimates by $1.8 billion and reflecting a 62% year-over-year growth pace. The surge was driven largely by data-center demand, which jumped 66% to $51.2 billion. Yet the company's gross margin slipped 1.2 percentage points YoY, and inventory ballooned to $19.8 billion, sparking investor concerns about AI market sustainability. Despite a $500 billion order backlog for 2025-2026, the stock initially surged then fell nearly 3%, underscoring broader macro uncertainties.

TSMC's Q3 2025 performance offered a different picture: reported $33.1 billion in revenue, a 59.5% gross margin, and $13.7 billion of operating cash flow. Advanced-node processes-3nm, 5nm, and 7nm-accounted for 74% of wafer revenue, highlighting the firm's technology leadership. Full-year 2025 revenue growth is projected in the mid-30% range, with capex guidance narrowed to $40-$42 billion. Inventory stayed near 74 days, while accounts receivable turnover slipped just two days, indicating solid cash conversion despite geopolitical headwinds.

U.S. policy actions have intensified pressure on both firms. The government revoked TSMC's fast-track export status for its Nanjing, China plant, effective December 31, requiring future shipments to obtain U.S. licenses. The move aligns with broader export controls aimed at restricting advanced semiconductor technology in China. TSMC's shares remained stable amid the shift, contrasting with the sector-wide volatility seen after Nvidia's inventory warning.

The Department of Commerce also closed a loophole in the VEU program, mandating that former VEU participants apply for permits to operate existing facilities in China-though they will not receive approval for capacity expansions or technology upgrades. The rule is intended to prevent competitive disadvantages for U.S. companies, further capping TSMC's growth prospects in the region.

For investors, Nvidia's AI momentum remains compelling but carries inventory-risk and margin-pressure signals. TSMC's resilient fundamentals and strong cash flow are offset by policy-driven limits on its China expansion. The contrast highlights a sector at a crossroads-where AI demand meets geopolitical friction.

Moving beyond revenue growth, TSMC's cash generation and margin structure reveal significant advantages over Nvidia. The semiconductor foundry produced $13.7 billion in operating cash flow during Q3 2025, a position that enables its planned $40-42 billion capital expenditure for the year. This financial muscle is anchored by strong gross margins at 59.5%, driven by diverse demand for 3nm, 5nm, and 7nm processes that generate 74% of wafer revenue. Such consistent cash flow provides a foundation for strategic investments and buffer against market fluctuations.

Nvidia faces contrasting margin pressures despite its revenue surge. While revenue reached $57 billion in the quarter, gross margins declined 1.2 percentage points year-over-year. Inventory buildup to $19.8 billion raises concerns about inventory management and AI demand sustainability. The company's massive $500 billion order backlog for 2025-2026 provides near-term visibility but doesn't resolve margin erosion risks from rising component costs and competitive pricing pressures.

Both companies face similar macro risks. TSMC's supply chain efficiency shows strain with a 2-day accounts receivable turnover increase, while Nvidia's inventory turnover metrics remain unreported. The AI demand volatility affecting Nvidia's near-term outlook could ultimately impact TSMC's advanced process utilization. Investors should note that TSMC's cash flow strength provides more flexibility to navigate potential downturns, while Nvidia's profit margins remain vulnerable to both operational execution and market sentiment shifts in the AI infrastructure space.

Vulnerabilities in TSMC's Resilience

TSMC's perceived immunity faces real tests. While South Korean rivals like Samsung face steeper pressure from US policy shifts, TSMC's Chinese operations remain constrained. The US revoked its fast-track export status for TSMC's Nanjing plant, demanding licenses for equipment shipments by December 31. This blocks expansion or tech upgrades there, mirroring broader export controls tightening. The US further closed a loophole in its VEU program, forcing foreign firms to seek licenses for existing Chinese facilities and prohibiting capacity increases or tech upgrades for them too. Unlike competitors, TSMC's shares held firm during these policy changes, but this stability masks operational restrictions in China.

Crucially, TSMC's massive capex plans face a potential funding cliff if AI demand softens. Nvidia's recent earnings illustrate this risk: despite record $57 billion revenue driven by AI chips, inventory surged to $19.8 billion. This buildup sparked investor fears about AI market sustainability and profitability, even as Nvidia reported a massive $500 billion order backlog. TSMC's own capex guidance for 2025 sits at $40-42 billion according to financial reports, a level only sustainable if current demand holds. A slowdown could strain cash flow and force difficult choices on this spending.

TSMC's strong Q3 cash flow of $13.7 billion provides a buffer, but it's not immune to broader supply chain frictions and geopolitical shocks. Its accounts receivable turnover lengthened by 2 days, indicating slightly slower cash collection, while inventory levels, though down slightly to 74 days, remain a potential drag if demand shifts. The company's reliance on advanced nodes (3nm, 5nm, 7nm driving 74% of revenue) also means it faces the same global semiconductor cycle risks as peers. While cash flow remains robust and order visibility is currently strong, the sustainability of its capex trajectory hinges critically on AI demand persisting without a sharp inventory correction like Nvidia's.

Scenarios & Catalysts: Valuation Implications

Investor expectations for AI chip leaders hinge on two key variables: sustained demand and evolving regulatory constraints. TSMC's valuation premium appears anchored to its cash flow resilience and continued AI infrastructure investment through 2026, though policy risks threaten its China operations. The company's Nanjing fab currently contributes modest revenue, but revoked fast-track export status for semiconductor equipment could constrain future flexibility amid tightened U.S. controls on advanced technology transfers to China. This regulatory pressure intersects with broader crackdowns on circumventing restrictions, including new rules forcing foreign firms to seek permits for existing China facilities while blocking expansion or tech upgrades.

Nvidia's recovery path faces sharper near-term headwinds. While its half-trillion-dollar order backlog signals strong AI momentum, inventory buildup and margin compression raise sustainability questions. Share price performance will likely track two factors: inventory drawdown pace and gross margin normalization as supply chains stabilize according to earnings analysis. A swift resolution of these dynamics could rekindle investor enthusiasm, but persistent policy uncertainty and demand shocks remain critical downside risk factors for both companies.

The valuation landscape remains hostage to geopolitical friction and cyclical inventory adjustments. Even with strong fundamentals, both firms face amplified volatility from regulatory shifts that could recalibrate growth trajectories. Investors should monitor permit applications under new compliance rules and inventory turnover metrics closely, as these will signal whether current valuations reflect reality or optimism.