TSMC (TSM) Q3 2026 earnings review
TSMC lifts outlook again, but its newest chips cost more
TSMC's newest chips are selling as fast as it can make them, but they cost more to produce for now. Revenue rose 41% in US dollars, above the top of its own range, and chairman and chief executive C.C. Wei lifted the full-year plan to about 44% growth. Gross margin slipped 1.3 points from last quarter because the 2-nanometer process, TSMC's most advanced, is in its costly early phase.
| Revenue | $46.7B above the top of its own range |
|---|---|
| Gross margin | 66.4% 67.7% last quarter |
| 2-nanometer share of wafer revenue | 8% 3% last quarter |
| Full-year revenue outlook | Raised about 44% growth, from slightly above 40% |
⚖️ Verdict: 🟢 Bullish
The story got better because the fourth-quarter outlook sits above what the July plan pointed to, by our math, so that plan was cautious. The bad news: capital spending fell even as finance chief Wendell Huang held the full-year budget, so the fourth quarter must carry more spending than any quarter this year.
The question now is whether spending keeps pace with the demand Wei describes. Either the fourth quarter catches up as tools arrive, or tight tool supply and higher prices mean the budget buys less capacity than planned. January's capital spending figure and the 2027 budget will tell.
🐂 Bull Case
TSMC Raises Its Outlook for a Third Time
TSMC makes chips for other companies, and its most advanced ones go into the processors that run AI data centres. Demand for those chips exceeds what its plants can produce. 'We did not see any sign of slowdown,' chairman and chief executive C.C. Wei said.
The numbers back him this quarter. Revenue from high-performance computing, the category that holds AI processors, grew 22% from the previous quarter and reached 68% of sales. The result came in above the top of the range Wei set in July, by the widest distance in the four quarters we can check.
Wei lifted the full-year plan to about 44% growth in US dollars, the third raise this year. That matters because, by our math, the July plan already pointed to a fourth quarter below the range he set this week. So the earlier plan was cautious, and the open point is whether the new one is cautious too.
What to watch: fourth-quarter revenue in January, against the range TSMC set this week. A result above its top would show the cautious plans continuing, and would make the first 2027 outlook likely to be set the same way.
2-Nanometer Chips Are Already 8% of Wafer Sales
The 2-nanometer process is TSMC's newest and most advanced way of making chips, and it entered volume production at the end of 2025. Its share of wafer revenue reached 8%, from 3% last quarter. The 3-nanometer process it follows climbed to 33%, so the two newest generations now supply more than two-fifths of wafer sales.
Wei said TSMC expects 2-nanometer 'annual capacity to more than double in 2027', on orders from smartphone and AI customers alike. He also added a second new 3-nanometer plant in Tainan, due in early 2028, and pulled the second Arizona plant's start forward to the third quarter of 2027, 'slightly ahead of our previous schedule'. The newest process carries the highest prices, so its rising share lifts revenue per wafer.
What to watch: the 2-nanometer share of wafer revenue in January. A share well above this quarter's 8% would confirm that the new plants and tools are producing at the pace Wei describes, and that the margin cost of the ramp is buying growth.
Positives This Quarter Didn't Test
Four claims that support the bull case got new words from Wei this quarter but no new numbers. Each item below names the figure that would turn the words into evidence, and none of them has arrived yet.
- AI accelerator growth: asked whether the mid-to-high 50% yearly growth target to 2029 still holds, Wei said 'It probably will be higher'; a refreshed figure would move it.
- Agentic AI processors: Wei said 'the demand from agentic AI CPUs continue to increase', but TSMC keeps them out of its AI count; a revenue share would move it.
- US expansion: 'We send the teams to Texas to do all the evaluation', Wei said, and TSMC is in talks on a customer's Terafab site where 'the fab has to be run by TSMC'; a site decision with capacity would move it.
- Data-centre readiness: TSMC staff now check US data-centre and power build-out, and 'The feedback is so far so good'; no measure was given.
🐻 Bear Case
The 2-Nanometer Ramp Is Pulling Margins Down
A new chipmaking process costs more per wafer in its first year because yields and volumes are still climbing. Gross margin, the share of revenue left after the cost of making the chips, fell 1.3 points from last quarter to 66.4%. TSMC named the 2-nanometer ramp as the cause.
- Cost of making the products: 33.6% of revenue, from 32.3% last quarter
- Third-quarter range: the margin landed inside it, after three straight quarters above its top
- Fourth-quarter plan: 66% at the middle, another 0.4 points lower
- Overseas plants: 'closer to 2%' of dilution this year, widening to 3–4 points in later years, finance chief Wendell Huang said
Huang said productivity gains and moving capacity between process generations offset part of the drag. The record shows the offsets no longer beat the plan: the margin used to land above the range, and this quarter it landed inside. Wei treats the overseas plants as a cost that scale will manage, but Huang's own figure for that cost widens from 2027.
What to watch: fourth-quarter gross margin in January, against the range TSMC set this week. A result above its top would show the cost tools outrunning the ramp again, before the wider overseas dilution Huang expects from 2027 arrives.
Spending Fell While the Budget Stayed
Huang repeated the full-year capital budget and said spending from 2026 to 2028 will be 'even more significantly higher than the past three years'. Yet capital spending, the money TSMC puts into plants and tools, fell to $13.8 billion this quarter from $15.7 billion.
By our math the first nine months used $40.6 billion, so the budget leaves $19.4–23.4 billion for the fourth quarter, more than in any quarter this year. 'The tool price inflation is real,' Huang said, and tool supply is tight. So part of that money buys the same tools at higher prices, and the rest depends on deliveries arriving in time.
What to watch: fourth-quarter capital spending in January, with the 2027 budget beside it. A figure near $21 billion would show the step-up Huang describes arriving on schedule rather than slipping into next year.
Consumer Demand Weakens as TSMC Plans 2027 Cautiously
TSMC sorts its sales by the devices its chips end up in, and the picture outside AI has turned soft. Wei said 'consumer and price-sensitive end market segment are being challenged' by rising component prices, so 'we are being prudent in our business planning going into 2027'.
- Digital consumer electronics: down 12% from last quarter
- Others: down 10% from last quarter
- Smartphone share of revenue: 21%, from 30% a year ago
- High-performance computing share of revenue: 68%, from 57%
This matters because growth now rests on one customer group. North American customers supplied 79% of revenue, and Wei again declined to discuss any single customer. A pause in AI spending would therefore hit a company with less other revenue to fall back on than a year ago.
What to watch: the 2027 outlook in January. A growth figure far below this year's would be the first number behind the word 'prudent', and would show whether the caution covers only consumer chips or the AI business too.
Risks This Quarter Didn't Answer
Five standing risks got comments on the call but no numbers in the materials. Each item names the reading that would move it, and where that reading should appear.
- AI spending pause: Wei says demand still exceeds supply, but gave no order-book figure; a fall in high-performance computing revenue from one quarter to the next would be the first signal.
- Customer concentration: TSMC does not disclose its largest customers' share, and North America at 79% is the only proxy; the annual report's top-customer figure would settle it.
- Second sources: questions covered Intel's EMIB-T packaging and rivals adopting High NA lithography before TSMC's 2030 plan; Wei said 'the CoWoS is still the number one choice for our customer'; a named customer moving packaging elsewhere would move it.
- Geopolitics: no new comment on tariffs or export rules; any change in US policy on Taiwan-made chips would move it.
- Customer prepayments: the release shows no figure for cash customers paid in advance for capacity; the quarterly filing will show whether it is rebuilding.
👓 Other Themes
US Tax Credits Brought In NT$199 Billion of Cash
Other investing sources contributed NT$198.74 billion of cash this quarter, which the company says came mainly from 'U.S. Treasury Department Investment Tax Credits'. The credit for qualified US investment rose to 35% from 25% this year. By our math the inflow is about $6.2 billion, almost half of what TSMC spent on plants and tools in the quarter.
GlobalFoundries Will Make Interposers for TSMC Packaging
Advanced packaging joins several chips into one AI processor, and the interposer is the silicon base they sit on. Wei confirmed a deal under which GlobalFoundries, a smaller US foundry, will supply interposers, because TSMC has 'a little bit shortage on the back end'. He also said TSMC is already producing packages five times the standard reticle size, which he claims no rival can match today.
💲 Other KPIs
Cash left after plants and tools more than tripled from a year ago, as operating cash flow rose and capital spending dipped. It has climbed for two quarters after a drop in the second. By our math free cash flow was 32% of revenue, against 14% a year ago.
Up 8% from last quarter, against revenue up 18%. The gap comes from a NT$63.2 billion gain on the sale of part of TSMC's Vanguard stake, booked in the second quarter. Excluding it, by our math, net income rose about 19%, close to the 14% rise in operating income.
Customers paid one day faster than last quarter but three days slower than a year ago. Receivables stood 57% above the year-ago level against revenue up 51% in NT dollars, a narrower gap than last quarter's. The chipmaker gave no reason for the earlier rise.
Each wafer shipped earned about $10,400, by our math, 29% more than a year ago. Shipments themselves rose 9.6%, so prices and product mix did most of the work: the newest processes cost more per wafer and make up a larger share. In NT dollars the gain is bigger because the currency weakened.
🔮 Guidance
New. The middle of the range is $53.3 billion, 14% above this quarter. By our math that is 58% above a year ago, when growth was the slowest of 2025, so an easy comparison helps. The July full-year plan pointed to $49.5–50.7 billion for this quarter, by our math, and the new range sits above it.
New. The middle of the range, 66%, is 0.4 points below this quarter. Huang said the 2-nanometer ramp and overseas plants dilute it further, with productivity gains offsetting part of that. The assumed exchange rate is 31.8 NT dollars per US dollar, so a weaker Taiwan dollar would add to the number. The range matches the third-quarter one, which the chipmaker landed inside.
New. The middle of the range is 1.2 points below this quarter's result. Operating expenses held at 7.8% of revenue, so the planned decline comes from gross margin rather than research spending. TSMC has beaten the top of this range in each of the last four quarters, but the beats shrank each time, from 3 points to 0.7; if the pattern holds, the fourth quarter lands near the top.
Raised. The plan now has 2026 revenue up about 44% in US dollars, or about $176 billion by our math. The outlook has risen three times this year, from close to 30% in January. The figure is consistent with the middle of the fourth-quarter range, so it adds no information beyond that range.
Unchanged. The budget set in July stands, and Huang said spending from 2026 to 2028 will be 'even more significantly higher than the past three years'. The budget has moved up twice this year, from $52–56 billion in January. Nine months used $40.6 billion of it, so by our math the fourth quarter carries the rest, about $21 billion at the middle.
❓ Key Questions
Will fourth-quarter capital spending really reach $19–23 billion?
Capital spending fell this quarter while Huang held the budget, and tool supply is tight. A shortfall would delay the 2028–29 capacity Wei is promising; a full quarter would lift 2027 depreciation. Huang should also say how much of the budget is tool-price inflation.
What share of revenue comes from the top five customers?
North American customers supplied 79% of revenue and AI computing 68%, so a few buyers carry the company. TSMC does not disclose concentration between annual reports, and Wei again declined to discuss specific customers.
How large are customer prepayments, and are they growing?
Customers prepay to reserve capacity, and that balance had been falling through last year's third quarter. The release shows no contract liabilities or temporary receipts; the quarterly filing should, and a rebuild would be a demand signal.
What does 'prudent' planning for 2027 mean in numbers?
Wei paired his strongest demand language yet with caution about 2027 on consumer and price-sensitive chips. A 2027 growth range and capital budget in January would show whether the caution covers consumer chips only or the whole business.
Why do receivables still grow faster than revenue?
Receivables rose faster than revenue again, and days of receivable stood at 28 against 25 a year ago. The gap narrowed from last quarter, but TSMC has not said whether customer terms, mix or quarter-end timing explain it.