We have another busy earnings week ahead.

My primary focus will be Netflix, Meta Platforms, and Spotify, with reviews planned for all three.

MSCI and Molina Healthcare are also high priorities. I'll be reviewing their quarters regardless, although whether I can publish the full reviews this week will depend on time. If not, I'll get to them after earnings season begins to wind down.

As always, any portfolio decisions will still be disclosed at the end of the posts, even if the full reviews aren't ready.

Other companies on my radar include GE Aerospace, Moody's, Rollins, Deckers, and American Express.

Disclaimer: This is not financial or investment advice. I'm sharing my personal investment decisions and reasoning for educational and informational purposes. Always do your own research before making any investment decisions.

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract chip manufacturer, producing semiconductors designed by other companies. Its advanced manufacturing and packaging technologies serve markets ranging from smartphones to AI data centers. The third quarter delivered another sharp increase in revenue as demand for its most advanced technologies continued to strengthen.

Quarter at a Glance

What Mattered

1/ No Slowdown In AI Demand

Demand for TSMC's most advanced technologies remained exceptionally strong in Q3. High-performance computing (HPC) revenue grew 22% sequentially and accounted for 68% of total revenue, up from 57% a year earlier. Management also raised its full-year revenue growth outlook to approximately 44% in U.S. dollars, from slightly above 40%.

CEO C.C. Wei emphasized that AI demand is expanding beyond accelerators, with the emergence of agentic AI driving additional demand for CPUs and networking chips. He also highlighted growing adoption of open-source AI models, which he believes will lower barriers to AI usage and ultimately increase demand for advanced semiconductors. When asked about TSMC's existing forecast for AI accelerator revenue to grow at a mid-to-high-50% annual rate through 2029, Wei suggested growth could be even higher, although he did not provide a revised estimate.

Management believes AI demand continues to exceed available supply, with no signs of slowing. However, that strength is not uniform across the business. Wei cautioned that consumer and price-sensitive markets remain challenged by rising component costs and broader economic uncertainty.

2/ An Unprecedented Capacity Expansion

TSMC has nearly 20 factories in development worldwide as it expands production capacity. This includes 13 advanced chip manufacturing and packaging facilities in Taiwan and another five to six overseas. The company reiterated its $60B–$64B capital expenditure budget for 2026 and expects spending from 2026 through 2028 to be significantly higher than in the previous three years.

Much of that expansion is already taking shape. Management expects annual capacity for its 2nm technology family to more than double in 2027, while an additional 3nm factory in Taiwan is scheduled to begin production in the first half of 2028. Its second Arizona factory is now expected to start production in Q3 2027, slightly ahead of schedule. TSMC is also working with GlobalFoundries to help address capacity shortages in advanced chip packaging.

Given the scale of these investments, analysts pressed management on the risk of overbuilding, particularly if data center construction, electricity availability, or other supply chain constraints delay AI deployments. Wei explained that TSMC considers these factors alongside customers' long-term production plans and has even sent its own teams to inspect U.S. data center construction and power availability. Findings have been positive so far, although management said it was too early to provide a forecast for overall capacity growth in 2027.

3/ Profitability Holds Up

TSMC maintained strong profitability in Q3, with gross margin reaching 66.4%, up 690 bps YoY, and operating margin at 58.7%, above management's guidance. Operating income increased 75% as revenue growth significantly outpaced operating expenses.

Sequentially, however, gross margin declined 130 bps, primarily due to the initial ramp-up of 2nm manufacturing. Management expects this pressure to continue into Q4, guiding for gross margin of 65%–67%. Overseas manufacturing also carries higher costs, with management estimating its current impact on gross margin at roughly 2 percentage points, widening to 3–4 points over the next few years.

To offset these pressures, TSMC is focusing on productivity improvements, optimizing manufacturing capacity across technologies, and reducing costs as its operations scale. Pricing could also play a role, although management provided limited detail. When asked whether reported price increases would apply to existing customer commitments or only additional capacity, Wei explained that pricing varies by technology, market, and manufacturing location without directly addressing the distinction.

Management remains confident in its ability to deliver profitable growth, although the extent to which pricing and operational improvements can offset rising manufacturing costs remains uncertain.