To The Moon

$Taiwan Semiconductor Manufacturing(TSM)$ is set to release its fiscal Q3 2025 Earnings for reporting period (July 1, 2025 – September 30, 2025) on 16 October 2025 before market open.

Revenue: The consensus estimate is $31.5 billion, with some reports citing a higher figure of $32.07 billion. Both numbers fall within TSMC's own guidance range of $31.8 billion to $33 billion. TSMC has already reported its preliminary monthly sales for the quarter, indicating a total revenue of $32.3 billion, which is above the average analyst estimate.

Earnings Per Share: The consensus EPS estimate is $2.63 per ADR, representing a significant year-over-year increase. Some estimates show a slightly lower figure of $2.59. 

TSMC's Q2 2025 Earnings: AI-Fueled Beat Tempered by Cautious Guidance

Taiwan Semiconductor Manufacturing Company (TSMC, NYSE: TSM) reported blockbuster second-quarter 2025 results on July 17, 2025, handily beating Wall Street expectations. The world's leading foundry saw unprecedented demand for its advanced process technologies, driven by the relentless build-out of Artificial Intelligence (AI) infrastructure. However, the company offered a more conservative outlook for the third quarter, signaling margin pressures from overseas expansion and currency headwinds, providing a crucial lesson for investors on the costs of global leadership.

Q2 2025 by the Numbers: A Resounding Beat

TSMC's performance in the quarter ending June 30, 2025, showcased its dominant position in the semiconductor industry:

Revenue: $30.07 billion, a stunning 44.4% increase year-over-year (YoY) and surpassing the analyst consensus and the high end of its own guidance range of $28.4-$29.2 billion.

Earnings Per Share (EPS): NT15.36(US2.47 per ADR), marking a significant 60.7% YoY surge.

Gross Margin: 58.6%, coming in at the high end of the company's 57.0%-59.0% guided range, demonstrating strong pricing power and operational efficiency despite initial ramp-up costs.

The engine of this growth was clear. The High-Performance Computing (HPC) segment, which includes AI accelerators for clients like Nvidia and AMD, grew 14% sequentially and accounted for a staggering 60% of total revenue. The company's most advanced nodes showed remarkable adoption, with the 3-nanometer (N3) family contributing 24% of wafer revenue, while the mature 5-nanometer (N5) platform remained the largest contributor at 36%. Together, advanced technologies (7nm and below) made up 74% of total revenue.

Management Commentary: The AI Boom Continues

During the earnings call, CEO C.C. Wei confirmed that the results were "supported by continued robust AI and HPC-related demand." The company noted that demand for its cutting-edge process nodes and advanced packaging (CoWoS) continues to outstrip supply, a bottleneck for the entire AI industry that solidifies TSMC's critical role. In a sign of confidence, the management also raised its full-year 2025 revenue growth forecast to approximately 30% in U.S. dollar terms.

The Guidance and the Lesson: The Price of Expansion

While the Q2 results were celebrated, the guidance for Q3 2025 painted a more nuanced picture and offered a critical lesson for investors.

Q3 2025 Guidance:

Revenue: Forecasted to be between $31.8 billion and $33.0 billion. At the midpoint ($32.4 billion), this represents a healthy 8% sequential increase, driven by the seasonal ramp-up for new smartphone launches and sustained AI demand.

Gross Margin: Expected to be between 55.5% and 57.5%. This projected decline of roughly 210 basis points from Q2's 58.6% immediately caught the market's attention.

The Lesson Learnt: The core lesson from the guidance is that hyper-growth and global expansion come at a cost that will temporarily weigh on profitability.

TSMC's management explicitly attributed the anticipated margin decline to two primary factors:

Margin Dilution from Overseas Fabs: As the new fabrication plants in Kumamoto, Japan, and Arizona, USA, begin to ramp up production, their initial operating costs are significantly higher than those of established fabs in Taiwan. Management quantified this headwind, forecasting a dilution of 2% to 3% annually in the early stages of this global footprint expansion.

Unfavorable Foreign Exchange Rates: The appreciation of the New Taiwan dollar against the U.S. dollar negatively impacts margins. Management noted that a 1% appreciation erodes gross margin by approximately 40 basis points.

This guidance served as a clear reminder that even for a company with immense pricing power like TSMC, the immense capital expenditures ($38-$42 billion maintained for 2025) and the operational complexities of building a global manufacturing network will create near-term pressure on its hallmark profitability. While the company reiterated its confidence in achieving a long-term gross margin of 53% and higher, the guidance underscored that the path forward will not be linear. The market must now price in a period where strategic expansion temporarily overrides peak profitability, a necessary investment to secure future growth and geopolitical diversification.

Overall Market Backdrop & Expectations

The third quarter of 2025 for TSMC is expected to be dominated by several key themes:

Sustained AI Demand: The demand for AI accelerators and high-performance computing (HPC) chips from major clients like NVIDIA, AMD, and cloud service providers (Amazon, Google, Microsoft) is expected to remain the primary growth engine. The focus will be on TSMC's most advanced nodes and its cutting-edge advanced packaging technology, CoWoS (Chip-on-Wafer-on-Substrate).

Seasonal Smartphone Strength: Q3 is traditionally a strong quarter for the smartphone segment due to the ramp-up for new flagship device launches, most notably Apple's newest iPhone. This quarter's results will reflect the initial production wave for Apple's A-series processors, likely manufactured on an advanced iteration of the 3-nanometer (N3) process.

Maturing Technology Nodes: While the spotlight is on advanced nodes, the performance of mature nodes (like 28nm and above) will be indicative of the broader health of the consumer electronics, IoT, and automotive markets. Any weakness here could signal broader macroeconomic headwinds.

Capital Intensity & Margin Pressure: Investors will be closely monitoring the financial impact of TSMC's massive global expansion (fabs in Arizona, USA; Kumamoto, Japan; and Dresden, Germany) and the ramp-up costs associated with its next-generation 2-nanometer (N2) process. These investments are crucial for long-term growth but can pressure gross margins in the short term.

Key Metrics Investors Must Watch

Here are the critical data points to scrutinize when TSMC releases its report and holds its conference call. The stock's reaction will likely depend on how these metrics stack up against analyst consensus and, more importantly, the company's own forward-looking guidance.

1. Headline Numbers vs. Consensus

Revenue: Did the company meet, beat, or miss revenue expectations? Look for performance relative to the guidance provided at the end of Q2 2025. A significant beat would signal robust demand, likely from AI and Apple.

Earnings Per Share (EPS): This is the key profitability metric. Beating EPS estimates is critical for investor sentiment.

Gross Margin: This is arguably one of the most important metrics for TSMC. The company targets a long-term gross margin of 53% and higher. Watch if they can maintain this level despite the costs of ramping new technologies (N3) and overseas fabs. A figure below 51%-52% could be viewed negatively.

2. Revenue Breakdown (The Story Behind the Numbers)

By Technology Node:

N3 (3nm Family): What percentage of revenue now comes from the 3nm family? A rapid increase signifies strong adoption by key customers and TSMC's technology leadership. This is expected to be the key growth driver.

N5 (5nm Family): Is this node family holding up as a major revenue contributor? It is a workhorse for many current-generation AI, HPC, and premium smartphone chips.

N7 (7nm Family): Is revenue from this node declining gracefully or falling off a cliff? A steep drop could indicate intensifying competition or a faster-than-expected migration by customers.

By Platform:

High-Performance Computing (HPC): Expected to be the strongest segment. Listen for commentary on AI-related demand. Is it accelerating, stable, or showing any signs of a slowdown? This segment now often rivals or exceeds Smartphones in revenue contribution.

Smartphone: Should see a seasonal boost from Apple. Any commentary on demand from the Android ecosystem, particularly in the premium tier, will also be important.

Automotive: A key long-term growth area. Is this segment continuing its steady growth, or is it being impacted by a slowdown in EV sales?

3. Q4 2025 Forward-Looking Guidance

This is often more important for the stock's short-term movement than the Q3 results themselves.

Q4 Revenue Guidance: The market will have a consensus estimate. Guidance that is significantly above consensus will be very bullish. In-line guidance may be met with a neutral-to-slight-positive reaction, while a miss will almost certainly send the stock lower.

Q4 Gross Margin Guidance: Where does management see margins heading? Continued margin strength above 53% would be a strong positive signal about their pricing power and cost control.

4. Management Commentary on the Conference Call

The "color" provided by management is invaluable. Listen for specific comments on:

CoWoS Capacity: Is demand still outstripping supply for advanced packaging? Are their capacity expansion plans on track? This is a critical bottleneck for the entire AI industry.

N2 (2nm) Progress: Any updates on the development timeline, customer engagement, and expected ramp-up in 2026. Positive news here solidifies their long-term roadmap.

Capital Expenditures (CapEx): Are they maintaining their full-year 2025 CapEx forecast? An upward revision signals confidence in future demand, while a cut could raise concerns.

Global Fab Status: Updates on the progress, timelines, and talent acquisition for their fabs in the US, Japan, and Germany. Any new delays or cost overruns would be a negative.

TSMC (TSM) Price Target

Based on 17 analysts from Tiger Brokers offering 12 month price targets for TSMC in the last 3 months. The average price target is $298.65 with a high forecast of $400.00 and a low forecast of $205.00. The average price target represents a 0.92% change from the last price of $295.94.

Potential Short-Term Post-Earnings Trading Opportunities

Earnings reports create volatility, which can present opportunities for short-term traders. Here are two primary scenarios:

Bullish Scenario: "Beat and Raise"

What it looks like: TSMC reports Q3 Revenue and EPS that beat analyst estimates. More importantly, it issues Q4 guidance (both revenue and gross margin) that is above consensus. Management commentary is overwhelmingly positive on AI demand, the N3 ramp, and N2 progress.

Potential Trade:

Going Long: Buying shares of TSM immediately following the report.

Options: Buying call options (e.g., short-dated, slightly out-of-the-money calls) to play for a sharp upward move. This is a higher-risk, higher-reward strategy.

Strategy: Look for the stock to break through recent resistance levels on high volume as a confirmation of the bullish trend.

Bearish Scenario: "Miss and Lower" or "Weak Guidance"

What it looks like: TSMC misses on revenue or EPS, or (more likely) provides Q4 guidance that is below analyst expectations. This could be caused by a surprise slowdown in smartphone demand, margin erosion from high costs, or a cautious outlook on the broader economy.

Potential Trade:

Going Short: Short-selling shares of TSM (for experienced traders comfortable with the risk).

Options: Buying put options to profit from a decline in the stock price. This can also be used to hedge an existing long position.

Strategy: Look for the stock to break below key support levels. Weak guidance is often a powerful catalyst for a downward move, as it forces analysts to revise their models lower.

Important Consideration: Implied Volatility (IV)

For options traders, be aware of "IV Crush." Implied volatility is typically high leading into an earnings announcement. Immediately after the news is released, this volatility collapses. This means that even if you correctly guess the direction of the stock move, the decrease in the option's value from IV crush can lead to a loss. Therefore, the stock needs to move more than the market's priced-in expectation to be profitable.

TSM implied volatility (IV) is 45.9, which is in the 94% percentile rank. This means that 94% of the time the IV was lower in the last year than the current level. The current IV (45.9) is 12.1% above its 20 day moving average (40.9) indicating implied volatility is trending higher.

Technical Analysis - Exponential Moving Average (EMA)

So we might see a recovery from TSM after it has slightly recovered from the decline on Monday (13 Oct), and with the sentiment build up over the partnership with OpenAI for AMD, Broadcom and ARM.

Will TSM 3nm Family be the next one to be looked at by hyperscalers or OpenAI? And how much revenues would this segment contribute? I would think we might want to take a cautious approach to see how the share price movement today (15 Oct).

Summary

For its upcoming Q3 2025 earnings on October 16th, TSMC is expected to post strong year-over-year growth, fueled by persistent AI demand and the seasonal ramp-up for new smartphones. Investors will keenly watch if revenue beats its own guidance of $31.8-$33.0 billion.

The crucial metric will be the gross margin, guided to contract to 55.5%-57.5%. This expected dip reflects the high operational costs of its new overseas fabs in the US and Japan, alongside currency headwinds. A significant deviation from this range will signal TSMC's ability to manage its global expansion costs.

Beyond the headline numbers, the revenue mix from advanced nodes (3nm and 5nm) and commentary on AI-driven demand for its CoWoS advanced packaging are critical. Most importantly, the forward-looking guidance for Q4 will determine the stock's trajectory, revealing whether the powerful AI momentum can continue to offset near-term margin pressures from its strategic global diversification.

Appreciate if you could share your thoughts in the comment section whether you think TSM would be able to provide a significant improvement in its revenue from contribution from its advanced nodes (3nm and 5nm).

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire @MillionaireTiger appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.