Taiwan Semiconductor (TSMC) Posted Record Profit and the Stock Still Fell. Here's What the Market Is Worried About.

TSMC (NYSE: TSM), the world's top contract chipmaker, posted its third-quarter earnings on Oct. 15. Its revenue and net profit surged 50% and 69%, respectively, and set new record highs.

That also marked TSMC's sixth consecutive quarter of record profits. However, TSMC's stock slipped after that impressive report -- and it's still down 7% over the past month. Let's see why TSMC's stock didn't soar higher, and if it's worth buying in this choppy market.

Image source: Getty Images.

How fast is TSMC growing?

TSMC manufactures the world's most advanced chips for the largest fabless chipmakers, including Nvidia (NASDAQ: NVDA), AMD, and Broadcom. Most of its recent growth has been driven by the AI market's breakneck expansion.

In the third quarter, TSMC generated 68% of its revenue from producing high-performance computing (HPC) chips for AI-driven customers such as Nvidia. Its HPC revenue also rose 22% sequentially, marking a significant acceleration from its previous quarters.

Data source: TSMC. QoQ = Quarter-over-quarter.

TSMC also generated a third of its revenue from its 3nm node, which produces Nvidia's newest Vera Rubin computing platform. That expansion of that high-end node indicates that TSMC is maintaining its lead in the production of the world's smallest and densest chips. It also generated 8% of its revenue from its newest 2nm node.

Data source: TSMC.

For the full year, TSMC expects its revenue to rise 44% in USD terms. That's up slightly from its prior outlook for at least 40% growth, and marks its third top-line guidance boost in 2026.

It expects that acceleration to be driven by the increased production of AI chips and the expansion of its 2nm node. It didn't raise its full-year capex target of $60 billion to $64 billion.

Why did TSMC's stock pull back?

TSMC's headline numbers were impressive, but a few issues weighed down the stock. First, its gross margin of 66.4% -- which matched its own guidance of 65%-67% and expanded from its gross margin of 59.5% a year earlier -- dipped sequentially from 67.7% in the second quarter.

That sequential contraction wasn't surprising, since TSMC ramped up its 2nm production and expanded its overseas fabs during the quarter. But with its capex already set to hit record levels this year (up 47%-56% from 2025), that dip likely rattled some investors.

Another concern is the AI market's potential slowdown. Even though there is still plenty of pent-up demand for the latest AI chips, rising interest rates and other macro headwinds could throttle the market's near-term growth. If hyperscalers like Amazon and Microsoft rein in their AI spending, TSMC's HPC growth could cool off.

Lastly, TSMC's stock had risen 39% year-to-date before its third-quarter report. Therefore, a lot of optimism was already baked into its stock -- which limited its near-term growth potential.

Should long-term investors be worried?

TSMC will remain a linchpin of the semiconductor market for the foreseeable future, and it's still a balanced way to invest in the AI boom without putting too much faith in a single chipmaker. From 2025 to 2028, analysts expect its revenue and EPS to grow at CAGRs of 36% and 42%, respectively, as the AI chip market expands.

Those are incredible growth rates for a stock that trades at 16 times next year's earnings. So if you plan to hold TSMC for a few years instead of a few quarters, it's still a great time to accumulate this reliable semiconductor stock.

Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Broadcom, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.