After Upbeat Outlook, Is It Time to Buy Taiwan Semiconductor Manufacturing?

While its shares didn't get a lift, Taiwan Semiconductor Manufacturing (NYSE: TSM) once again reported strong quarterly results and upped its guidance. The stock is still up about 50% on the year.

Let's take a look at the semiconductor contract manufacturer's Q3 results and outlook to see if now is still a good time to buy the stock.

AI-fueled growth continues

Due to its scale and technological expertise, TSMC has become a critical part of the semiconductor supply chain and a driving force behind the artificial intelligence (AI) infrastructure buildout. While chip designers such as Nvidia and Broadcom garner much of the headlines, without TSMC, their advanced chips would not be able to be manufactured at scale.

In order for chips to continue to advance, more transistors need to fit on them in order for chips to have greater processing power and better energy efficiency. In the semiconductor industry, this is commonly referred to as node size, and TSCM is the leader in shrinking node sizes.

In Q3, nodes 7 nanometers (nm) and under accounted for 74% of its revenue, up from 69% a year earlier. Its newest 3-nm technology made up 23% of total wafer revenue, increasing from 20% a year ago.

While AI chips have been the biggest driver of TSMC's revenue growth, high-performance computing (HPC) revenue was actually flat sequentially, while smartphone revenue grew 19% quarter over quarter to account for 30% of its total revenue, up from 27% in Q2. HPC revenue represented 57% of its total revenue, down from 60% in Q2 but up from 51% a year ago.

Overall, the company's revenue climbed 41% to $33.1 billion, or 30% in local currency. Its earnings per American depositary receipt (ADR) soared 51% to $2.92 from $1.94 a year ago, while its EPS in local currency jumped 39%.

TSMC once again saw solid year-over-year margin expansion, with gross margin up 170 basis points to 59.5% and operating margins climbing 310 basis points to 50.6%. Both numbers were well ahead of its prior forecast. However, it did continue to expect its overseas expansion to negatively impact its gross margins by around 2% to 3% a year and then widen to 3% to 4% a year in the later stages of its fab expansion.

Looking ahead, TSMC projected Q4 revenue to come in between $32.2 billion and $33.4 billion, representing about 22% year-over-year growth at the midpoint. It projected gross margins of between 59% to 61% and its operating margin to range from 49% to 51%.

For the full year, the company now expects closer to mid-30% revenue growth, up from the 30% growth it forecast last quarter. The company credited its outlook to strong demand for AI chips and a mild recovery in other chip markets.

Is it time to buy TSMC stock?

TSMC turned in another strong quarter, led by AI and smartphone chips. The company is still expecting AI chip demand to grow at a mid-40% compound annual growth rate (CAGR) through 2029, although it said the demand is currently outpacing that projection. Given all the big announcements from OpenAI and Oracle recently around their AI infrastructure buildout plans and the continued big spending by the big three cloud computing providers, the setup is certainly there for AI chip demand to continue to drive growth at TSMC for many years to come.

Meanwhile, the company is committed to building more cutting-edge capacity in the U.S., where it is looking to bring 2nm node technology. It also has plans for 1.6nm node sizes, as well. The one downside is that it's more expensive to operate in the U.S., which is leading it to increase prices. This is causing some customers to look for cheaper alternatives like Samsung, although the Korean company has still struggled with yields at lower nodes. That said, TSMC is still the undisputed leader in semiconductor manufacturing at this point.

Looking at valuation, TSMC trades at a forward price-to-earnings (P/E) ratio of 26 times based on analysts' 2026 estimates. Given the growth in front of it, that is not an expensive valuation. As such, I think the stock still looks like a good buy at current levels.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Oracle, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.