TSMC Poised for Blowout Q3 as 2nm Enters High-Volume Production
TREE NEWS reports: Taiwan Semiconductor Manufacturing Co. is set to report third-quarter results on Thursday (Oct. 15), and the numbers already look exceptional. The company’s Q3 revenue reached NT$1.49 trillion (about $46.7 billion), a 51% year-over-year increase that exceeded the average analyst estimate of NT$1.46 trillion and topped the upper end of the company’s own guidance range of $44.6–45.8 billion. September alone brought in NT$511.86 billion, up 54.6% year over year, though slightly down 0.6% month over month.
The standout driver is the 2nm process node, which is ramping faster than expected. Analysts at BofA estimate 2nm will contribute roughly 11% of revenue in Q3, up from just 3% in Q2, fueled by Apple’s new mobile SoC inventory build and strong demand for AMD’s Venice server CPUs. Meanwhile, 5nm and 3nm utilization remains above 100%, supported by NVIDIA’s Rubin GPU, AMD’s MI400, AWS Trainium3, and Google’s TPUv8t/i.
Margin Pressure from Advanced Nodes
Both BofA and HSBC caution that gross margin may come in slightly below recent optimistic market expectations. BofA forecasts Q3 gross margin at 67.0% and Q4 at 67.8%, while HSBC sees 66.9% and 66.0%, respectively. The dilution from 2nm ramp-up—estimated at 3–4 percentage points—plus overseas fab expansion will partly offset gains from improved utilization and declining 3nm depreciation.
For the full year, BofA projects 2026 gross margin at 67.2% and 2027 at 68.9%, while HSBC forecasts 66.7% and 67.0%. Both expect margins to improve as TSMC implements 5–10% price hikes on advanced nodes in early 2027 and gradually absorbs depreciation costs.
Q4 and 2027 Outlook: Pricing Power Takes Center Stage
Both institutions expect strong Q4 momentum. BofA predicts Q4 revenue growth of 11% quarter over quarter, above the historical seasonal pattern of 7%, driven by a richer product mix. Revenue from 5nm and below should rise to 75% of total from 71% in Q3, with 2nm reaching about 18%. HSBC forecasts Q4 revenue of NT$1.677 trillion, up 12% QoQ, above consensus of 10%.
Looking to 2027, BofA raised its EPS estimate to NT$161.36, about 15% above consensus, while HSBC sees NT$152.77, roughly 5% above. The core thesis: TSMC will raise advanced node wafer pricing by 5–10% in early 2027, with mature nodes up 3–5%, driving further margin expansion.
Capex and Competitive Landscape
Capital expenditure remains aggressive. BofA expects 2026 capex around $63 billion, at the high end of guidance, funding 3nm expansion, 2nm ramp, and initial A16 installation. HSBC maintains a $64 billion forecast for 2026 and sees 2027 capex jumping to $85 billion. BofA projects 2027 capex at $83 billion, reflecting a roughly 20% CAGR from 2026–2028.
On competition from Elon Musk’s Terafab project, both analysts see limited risk. HSBC doubts TSMC will materially participate, as independent fab operation is crucial for maintaining technology leadership. BofA estimates that even with over $119 billion invested from 2026–2036, Terafab’s advanced node capacity would reach only about 96,000 wafers per month by 2036—far below TSMC’s scale. TSMC’s N3/N3E transistor density is roughly 30% higher than Intel’s 18A, with future A16 and A12 nodes potentially extending that advantage to 50–60%.
Valuation and Target Prices
BofA raised its target price to NT$3,260 from NT$3,100, based on 20x 2027E P/E, and lifted its ADR target to $620 from $590. HSBC was more aggressive, raising its target to NT$3,800 from NT$3,400, implying 25x 2027E P/E, with an ADR target of $766.44. BofA notes that TSMC’s major HPC customers trade at a 100–150% valuation premium to TSMC versus a historical average of 53%, suggesting TSMC’s rally has been driven by earnings upgrades rather than multiple expansion—leaving room for further re-rating.
Key Takeaways for Investors
- AI demand remains robust: TSMC’s results and guidance will be a key barometer for the entire AI supply chain, from NVIDIA to AMD to cloud hyperscalers.
- 2nm is the new growth engine: Faster-than-expected ramp validates TSMC’s technology leadership and pricing power.
- Margin dilution is temporary: Near-term gross margin pressure from 2nm and overseas expansion should give way to improvement as pricing hikes kick in and depreciation rolls off.
- Valuation still reasonable: At 16x 2027E P/E, TSMC trades in the middle of its historical range, with upside if earnings continue to surprise.
- Watch the earnings call: AI demand outlook, capex plans, and US investment progress will be key focal points on Oct. 15.
