Market Volatility Masks Strong Fundamentals
Taiwan Semiconductor Manufacturing Company (TSMC) shares have experienced a notable decline, falling 14.24% over the past month and 7.19% over the past week, according to data cited by 24/7 Wall St. Despite this recent downward pressure, the semiconductor giant remains up 34.45% year to date, suggesting that short-term volatility has not erased broader gains. The drop in share price comes at a time when Nvidia, TSMC’s most prominent customer, is posting record-breaking financial results, creating a divergence between the chipmaker’s operational success and its stock performance.
24/7 Wall St. rates TSMC as a buy with high confidence, pointing to the company’s robust quarterly earnings as evidence of its enduring strength. The outlet’s proprietary model sets a price target of $515.81 for TSMC shares, implying a 26.97% upside from the trading price of $406.26. This bullish outlook is supported by analyst ratings that include six strong buy and 14 buy ratings against just one hold, indicating widespread institutional optimism despite the recent market pullback.
Financial Performance and Margin Pressures
TSMC’s financial results for the third quarter demonstrated significant growth in both earnings and revenue. The company reported earnings per share (EPS) of $4.60 per American Depositary Receipt (ADR), beating consensus estimates of $4.46. Revenue reached $46.7 billion, exceeding guidance and reflecting strong demand for its advanced chipmaking services.
However, the path to profitability has faced headwinds. TSMC’s gross margin slipped 1.3 percentage points to 66.4%, a decline attributed to costs associated with ramping its new 2nm process. Management has noted that overseas fabs currently lower gross margin by about 2%, and they expect this drag to widen to 3%–4% as more U.S. fabs come online. To support these expansion efforts, TSMC’s capital expenditure is set at $60 billion to $64 billion for 2026, a substantial investment aimed at securing future capacity.
The Nvidia Connection and Supply Constraints
Nvidia’s recent quarterly revenue of $96.22 billion, up 105.85%, highlights the symbiotic relationship between the two companies. Nvidia named TSMC as a manufacturing partner in its reports, underscoring the foundry’s critical role in producing the AI chips that drive Nvidia’s growth. Colette Kress, Nvidia’s CFO, described Nvidia’s outlook for roughly 70% fiscal 2028 growth as “a supply-constrained outlook,” directly linking Nvidia’s potential to TSMC’s production capabilities.
Reinforcing this dynamic, TSMC Chairman and CEO C.C. Wei stated, “Demand is still far above our capability to supply today.” This admission of capacity constraints suggests that TSMC is not just benefiting from Nvidia’s success but is also a bottleneck in the broader AI hardware ecosystem. Looking ahead, TSMC expects its 2nm capacity to more than double in 2027, with next-generation A14 process volume production starting in 2028, efforts designed to alleviate these supply pressures.
Valuation and Competitive Landscape
The valuation gap between Nvidia and TSMC remains stark. Nvidia trades at a trailing P/E of about 42 with a 75% non-GAAP gross margin, while TSMC trades at 18 times forward earnings with a 66.4% gross margin. This disparity raises questions about whether TSMC’s stock is undervalued relative to its partner’s explosive growth.
Competition in the AI GPU space is also intensifying. Advanced Micro Devices (AMD) competes with Nvidia and relies on outside foundries, growing Q3 revenue 44.68% while trading near 182 times trailing earnings. AMD’s reliance on external manufacturers further cements TSMC’s position as a key enabler of the AI hardware market, even as it faces risks from Taiwan-China tensions and U.S. export controls that models cannot fully price.