Taiwan Semiconductor Manufacturing (NYSE: TSM) is set to release its third-quarter earnings this Thursday, with revenue likely to significantly beat market expectations, further solidifying its position as the core supplier of global AI computing infrastructure. Multiple brokerages have promptly raised their target prices and expect the growth momentum to continue into the fourth quarter.

According to a prior article, Bloomberg calculations based on Taiwan Semiconductor Manufacturing data show that the company's third-quarter revenue through September reached NT$1.49 trillion (approximately US$46.7 billion), representing a 51% year-over-year increase. This exceeds the analyst average estimate of NT$1.46 trillion and also surpasses the upper end of the company's previous guidance range of US$44.6 billion to US$45.8 billion.

Against this backdrop, Bank of America and HSBC both raised their target prices for Taiwan Semiconductor Manufacturing on October 12, maintaining buy ratings, with target prices of NT$3,260 and NT$3,800 respectively. Taiwan Semiconductor Manufacturing shares have already touched historical highs this month and are currently trading at NT$2,550.

The strong sales data have further reinforced market confidence in AI demand prospects, at a time when investors are broadly concerned about rising debt levels, increasing regulatory hurdles, and calls from OpenAI and Anthropic to slow the pace of AI technology development. Taiwan Semiconductor Manufacturing is a core foundry partner for Nvidia and Apple and is widely regarded by the market as an important bellwether for tracking AI demand. This week, AMD CEO Lisa Su stated that chip demand is expected to continue growing substantially over the coming years; Samsung Electronics reported operating profit surging nearly ninefold year-over-year; and AI server assembler Hon Hai Precision also posted quarterly sales exceeding expectations, with multiple signals jointly confirming the continued expansion of AI hardware demand.

Q3 Revenue Beat Driven Primarily by 2nm Ramp

Taiwan Semiconductor Manufacturing's September standalone consolidated revenue was NT$511.857 billion, up 54.6% year-over-year and down 0.6% month-over-month. Bloomberg calculations show that cumulative revenue for the first three quarters reached NT$3.899 trillion, up 41.1% from NT$2.763 trillion in the same period of 2025.

According to a Bank of America research report, third-quarter revenue exceeded both BofA's and market expectations, with sequential growth of +14% and +13% respectively, while actual growth came in at +18% (in NT dollar terms). BofA analyst Haas Liu believes this outperformance was primarily driven by the strong ramp of the 2nm process — 2nm revenue contribution is expected to rise from 3% in the second quarter to approximately 11% in the third quarter, mainly benefiting from mobile SoC stocking demand for Apple's new product launches and strong growth in AMD Venice server CPU demand. Meanwhile, 5nm and 3nm process utilization rates continue to exceed 100%, supported by multiple product upgrades in high-performance computing and AI, including the production ramp of Nvidia Rubin GPU, AMD MI400, AWS Trainium3, and the initial ramp of Google TPUv8t/i.

HSBC analyst Frank Lee similarly attributed the third-quarter revenue beat to strong demand for AI advanced processes in his research report, and expects third-quarter gross margin of approximately 66.9%, broadly in line with the upper end of the company's guidance range of 65% to 67%.

Gross Margin Expectations: Both Institutions Below Recent Market Optimism

On margin forecasts, both institutions remain cautious about recent market optimism. BofA forecasts third-quarter and fourth-quarter gross margins of 67.0% and 67.8% respectively, below recent market expectations of 67% to 68% and 68% to 69%. BofA notes that the gross margin dilution effect from the 2nm process ramp is approximately 3% to 4%, and combined with overseas fab capacity expansion, this will partially offset the positive impact from improved utilization and the gradual roll-off of 3nm depreciation.

HSBC's third-quarter gross margin forecast is 66.9%, narrowing further to 66.0% in the fourth quarter, explicitly stating that 2nm node yield ramp and overseas expansion will continue to bring gross margin dilution pressure, with its fourth-quarter forecast also below market consensus.

On a full-year basis, BofA forecasts full-year 2026 gross margin of approximately 67.2%, rising further to 68.9% in 2027; HSBC forecasts gross margins of 66.7% and 67.0% for 2026 and 2027 respectively. Both institutions expect that as Taiwan Semiconductor Manufacturing's price increases take effect in early 2027 and advanced node depreciation costs are gradually absorbed, profitability will show an improving trend.

Q4 and 2027 Outlook: Pricing Increases Drive Continued Growth

Both institutions expect fourth-quarter revenue to maintain strong growth momentum. BofA forecasts fourth-quarter revenue growth of approximately 10% to 15% sequentially (BofA's estimate is +11%), above Taiwan Semiconductor Manufacturing's historical seasonal pattern of +7%. BofA analysts believe the core driver of fourth-quarter growth will be blended average selling price improvement from the continued shift of product mix toward advanced nodes, with revenue contribution from 5nm and below processes expected to rise from approximately 71% in the third quarter to 75% in the fourth quarter, with 2nm contribution potentially rising further to approximately 18%.

HSBC forecasts fourth-quarter revenue of NT$1.677 trillion, up 12% sequentially, above market consensus of 10%.

Looking ahead to 2027, BofA raised its 2027 EPS forecast for Taiwan Semiconductor Manufacturing to NT$161.36, approximately 15% above market consensus; HSBC forecasts 2027 EPS of NT$152.77, approximately 5% above market consensus. The core logic of both institutions points to: Taiwan Semiconductor Manufacturing will raise advanced node wafer pricing by 5% to 10% in early 2027, combined with moderate price increases of 3% to 5% for mature nodes, driving further gross margin improvement.

Capital Expenditure Continues to Expand, Maintaining High-Intensity Investment from 2026 to 2028

On capital expenditure, BofA expects Taiwan Semiconductor Manufacturing's 2026 capex to be approximately US$63 billion, at the upper end of the company's latest guidance range of US$60 billion to US$64 billion, primarily for 3nm capacity expansion (approximately 55,000 to 60,000 wafers per month), 2nm capacity ramp (approximately 60,000 wafers per month), and initial installation of the A16 process (approximately 3,000 to 5,000 wafers per month). HSBC also maintains its 2026 capex forecast of US$64 billion and predicts it will rise to US$85 billion in 2027.

BofA analysts further note that 2027 capex is expected to jump further to approximately US$83 billion, representing a compound annual growth rate of approximately 20% from 2026 to 2028, reflecting continued capacity expansion for N3, N2, and A16 processes and accelerated deployment of CoWoS-L advanced packaging. Notably, equipment suppliers plan to raise front-end equipment prices by 10% to 15% and back-end packaging equipment prices by 5% to 10% starting in 2027, but BofA believes Taiwan Semiconductor Manufacturing, with its strong bargaining power, can pass on these cost increases to wafer pricing and fully reflect them when capacity comes online in 2028.

Terafab Competition Risk Limited, Taiwan Semiconductor Manufacturing's Technology Leadership Remains Solid

Market concerns about the competitive threat from Elon Musk's Terafab plan to build a mega-scale wafer fab are considered overstated by both institutions. According to a Reuters report on October 7, sources indicated that Taiwan Semiconductor Manufacturing is in discussions about participating in the Terafab project. HSBC analysts explicitly stated they do not believe Taiwan Semiconductor Manufacturing will substantively participate in the project, because independently operating wafer fabs is crucial for Taiwan Semiconductor Manufacturing to maintain its technology leadership and pricing power.

BofA conducted a quantitative analysis from a capacity scale perspective: even if Terafab invests more than US$119 billion between 2026 and 2036, constrained by high US domestic unit capacity construction costs (approximately over US$600 million per thousand wafers per month), its advanced node capacity by 2036 is estimated at only approximately 96,000 wafers per month, far below Taiwan Semiconductor Manufacturing's current scale. BofA concludes that Terafab will struggle to achieve economies of scale, and Taiwan Semiconductor Manufacturing will continue to serve as the core foundry partner for SpaceX and Tesla for the foreseeable future.

On the technology front, BofA estimates that Taiwan Semiconductor Manufacturing's N3/N3E transistor density is approximately 30% higher than Intel 18A, and future A16 and A12 nodes are expected to expand their density advantage over Intel 18A-P and 14A to approximately 50% to 60%.

Valuation Still Has Re-rating Potential, Both Institutions Raise Target Prices

On valuation, BofA and HSBC share the same directional view, but there is a notable difference in target prices. BofA, using a 2027 forecast P/E of 20x as its benchmark, raised its ordinary share target price for Taiwan Semiconductor Manufacturing from NT$3,100 to NT$3,260, and its ADR target price from US$590 to US$620, noting that the current 16x 2027 forecast P/E is at the midpoint of the historical range of 11x to 21x, suggesting valuation is not yet expensive.

HSBC provided a more aggressive target price, raising it from NT$3,400 to NT$3,800, corresponding to a 2027 forecast P/E of 25x, and raising its ADR target price from US$632.19 to US$766.44. HSBC believes that Taiwan Semiconductor Manufacturing's current pricing power is at its strongest level in history, making a valuation premium above the historical average reasonable.

BofA also noted that the valuation premium of Taiwan Semiconductor Manufacturing's major HPC customers relative to Taiwan Semiconductor Manufacturing itself is currently as high as 100% to 150%, compared to a historical average of approximately 53%, indicating that Taiwan Semiconductor Manufacturing's share price gains to date have been primarily driven by earnings estimate upgrades rather than valuation multiple expansion, with the latter still having significant room for correction. Taiwan Semiconductor Manufacturing will hold its third-quarter earnings conference on October 15, where AI demand outlook, capital expenditure plans, and US investment expansion progress are expected to be key market focuses.