Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM) posted stronger-than-expected third-quarter results on Thursday, as robust demand for AI, smartphone and high-performance computing chips supported revenue growth and pushed the company to accelerate capacity expansion.

During Thursday's earnings call, CEO C.C. Wei said there is "no ceiling" to the company's profitability, although significant gains will take time.

Wei expressed confidence in the company's long-term earnings potential as robust AI demand drives capacity expansion. However, he acknowledged that higher capital spending and the costs of expanding advanced chip production remain key considerations.

Q3 Revenue Tops Guidance

The contract chipmaker reported third-quarter revenue of $46.7 billion, up 16.2% sequentially and above the high end of its guidance.

Gross margin fell 1.3 percentage points sequentially to 66.4%, mainly due to the initial ramp of its 2-nanometer technology.

Advanced technologies at 7 nanometers and below generated 79% of wafer revenue. High-performance computing revenue climbed 22% sequentially and accounted for 68% of total revenue, while automotive revenue rose 23%.

AI Demand Supports Stronger Outlook

Taiwan Semiconductor expects fourth-quarter revenue of $52.3 billion to $54.3 billion, implying about 14% sequential growth at the midpoint.

Wei said AI demand remains "extremely robust" and the company has seen no signs of a slowdown.

Taiwan Semiconductor now expects full-year 2026 revenue to grow about 44% in U.S. dollar terms.

Wei said AI demand is expanding beyond accelerators into CPUs and networking chips. Growing adoption of open-source AI models could also increase demand for advanced silicon.

Taiwan Semiconductor Accelerates Global Capacity Expansion

Taiwan Semiconductor reiterated its 2026 capital-spending outlook of $60 billion to $64 billion and expects investments from 2026 through 2028 to significantly exceed spending during the previous three years.

The company is building 13 advanced fabs and packaging facilities in Taiwan and another five to six overseas.

Taiwan Semiconductor expects its second Arizona fab to begin production in the third quarter of 2027, slightly ahead of schedule. The company is also evaluating additional U.S. expansion in Texas.

Wei said demand continues to exceed supply and Taiwan Semiconductor is "working very hard to narrow the gap."

GlobalFoundries Deal Targets Back-End Shortage

Taiwan Semiconductor also disclosed a back-end supply agreement with GlobalFoundries Inc. (NASDAQ:GFS).

Wei said shortages in back-end capacity prompted Taiwan Semiconductor to work with GlobalFoundries to provide enough manufacturing capacity for customers.

"Our number one priority is to help our customer to be successful in their market," Wei said.

Costs and Overseas Expansion Pressure Margins

Taiwan Semiconductor expects its overseas fabs to dilute gross margin by roughly 3 to 4 percentage points during the later portion of its five-year expansion period.

Higher equipment, material and labor costs also remain challenges, although management expects scale, productivity gains and capacity optimization to offset some pressure.

Wei also dismissed concerns that rivals adopting High-NA technology earlier could erode Taiwan Semiconductor's competitive position, saying the company remains confident in its technology leadership.

Taiwan Semiconductor Plans Wafer Price Increases

The chipmaker reportedly plans to raise wafer foundry prices by 3% to 6% starting in January 2027, below earlier reports suggesting increases of 5% to 10%.

Taiwan Semiconductor reportedly plans larger hikes for its most advanced nodes amid tight capacity.

The increases would raise customers' fabrication costs and could give rivals such as Samsung Electronics Co. Ltd. (OTC:SSNLF) and Intel Corp. (NASDAQ:INTC) room to lift their own prices.

Persistent shortages across 2nm, 3nm and mature-node capacity also support Taiwan Semiconductor's pricing power.

TSM Price Action: Taiwan Semiconductor shares were down 1.63% at $423.00 during premarket trading on Thursday, according to market data.