Why? It’s a bit of a head scratcher.
The world’s largest semiconductor foundry, Taiwan Semiconductor (NYSE:TSM), logged blowout earnings in the third quarter, smashing analysts’ expectations.
Yet, the stock opened lower on Thursday, down about 1% at $301 per share shortly after the opening bell.
The reason is not entirely clear, although it may be related to the threat of higher tariffs and continued saber-rattling amid the U.S. – China trade war. That aside, the Q3 results for Taiwan Semiconductor, which goes by TSMC, were strong. Here are some key results, in USD.
- Revenue: $33.1 billion, up 40.8% year-over-year and 10.1% from the previous quarter. This was better than estimates of $32.07 billion.
- Net income: $14.7 billion, up 39% year-over-year.
- Earnings: $2.92 per share, up 39% year-over-year. This crushed estimates of $2.63 per share.
- Gross margin: 59.5%, up from 57.8% in the same quarter a year ago.
- Operating margin: 50.6%, up from 47.5% a year ago this quarter.
“Our business in the third quarter was supported by strong demand for our leading-edge process technologies,” Wendell Huang, chief financial officer of TSMC, said. “Moving into fourth quarter 2025, we expect our business to be supported by continued strong demand for our leading-edge process technologies.”
Why was the stock trending lower?
TSMC’s advanced chips accounted for 74% of its revenue in Q3. Specifically, the 7-nanometer chips accounted for 14% of sales, the 5-nanometer accounted for 37% of sales, and the 3-nanometer accounted for 23% of chip revenue. The 3-nanometer chips are the most advanced, followed by the 5-nanometer chips.
Looking ahead, TSMC projects revenue within a range of $32.2 billion and $33.4 billion in Q4, which would be slightly lower than Q3 at the midpoint. This could be one reason why investors pulled back, even though it marks a massive year-over-year gain.
Further, it anticipates the gross profit margin to be between 59% and 61%, which would be up slightly from Q3 at the midpoint. Operating margin is targeted to be between 49% and 51%, which would be down a tick at the midpoint from Q3 but up year-over-year.
Investors might have been cautious, but the Street liked what it saw. Needham raised its price target to $360 per share, from $270. Just a few days ago, Susquehanna boosted its price target to $400 per share, from $300. That would suggest 18% to 31% upside from its current share price.
TSMC could be challenged by higher tariff costs, but its position as the leading foundry for the chip industry, and its contracts to make chips for AI behemoths Nvidia and Apple, among others, places it in the center of the AI universe for a long time. Also, the company is looking to mitigate the impact of tariffs by investing $165 billion in U.S. chipmaking plants.
The stock is up 51% YTD, but it is still reasonably valued, with a P/E ratio of 31 and a forward P/E of 25. It still looks like a good option for investors.
