TSM Stock and the AI Bubble: 40%+ AI Accelerator Growth Fuels the Valuation Debate

Taiwan Semiconductor (NYSE: TSM) recently announced fiscal Q3 earnings, stating its longer-term AI revenue outlook is stronger than anticipated. The company reported record Q3 revenue of $33.1 billion, which was up by a solid 40.8% YoY and 10.1% sequentially.  

Over the last few months, the stock has surged as it’s up 50% since early June. At the time, we covered the stock in the article “Taiwan Semiconductor Stock: AI Growth Amid Geopolitical Risk”, we provided a scenario that could take the stock toward the $300s: “If we see the next drop take the form of a 3-wave drop that holds over $146, then we could be setting up for a rally toward the $300s.” At time of writing, the stock was at $203 and touched $304 on October 15th.  

For Taiwan Semiconductor (TSMC), the outlook is two-fold. On one hand, TSMC is deepening its moat with advanced nodes, such as N2 and A16. The company already powers tens of trillions in market cap on the stock market when you consider Apple, Nvidia, Broadcom, Amazon, AMD and Google are customers of TSMC. Essentially, all mega cap stocks have an AI strategy spanning merchant GPUs and custom silicon, and of course, software – yet the common denominator to these strategies is they all funnel into TSMC. 

Yet, on the other hand, many pundits have been asking – are we in an AI bubble? While AI leaders, related suppliers and strong R&D teams march onward with exceptional earnings reports, ongoing deal announcements and provide strong commentary that AI demand greatly outstrips supply – investors are left wondering what the true value is for the outsized growth. They say a picture is worth a thousand words and TSMC’s valuation chart certainly fits that description: 

Source: YCharts

Although no risk management plan will be entirely error-free, our firm has an outstanding 5-year record of handling the tech sector’s inevitable volatility. Whether it’s the trade plan we provided for free on TSM to our stock newsletter subscribers or the weekly trade alerts and webinars we offer behind our paywall on dozens of lesser-known AI stocks – we always have a plan as we seek to maximize the upside, while protecting to the downside.  

Below, we discuss the key items to track whether TSMC’s moat is intact - even as Intel increasingly becomes a United States darling with $11B in funding – plus not-to-miss highlights from the most recent earnings report. Last, we won’t leave you hanging with a note on how we managed our position after the strong run-up in June. 

TSMC Reports Record Q3 Revenue Growth of 40.8% on Surging AI Chip Demand

• TSMC revenue beat management guidance by 2.2% primarily due to robust AI-related demand. 
• Riding strong AI chip demand, TSMC once again boosts its full-year revenue growth guidance by 5 percentage points. 

TSMC reported a record Q3 revenue of $33.1 billion, up 40.8% YoY and 10.1% sequentially. The growth was primarily driven by strong demand for its leading process technologies (including 3nm, 5nm, and 7nm process nodes) due to the continuing demand for AI and high-performance computing chips.

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TSMC guided Q4 revenue of $32.2 billion to $33.4 billion, representing YoY growth of 22% and down (-0.9%) sequentially. Although management emphasizes strong AI-related demand, the guide shows a break in strong QoQ HPC revenue growth (more on this below). 

TSMC’s Q3 revenue rose 40.8% year-over-year, driven by strong AI and high-performance chip demand.

TSMC boosted full year revenue guidance by 5 percentage points for the second consecutive quarter to mid-30% on continued strong AI demand. This is up from the 30% growth provided in Q2.   

Management sounded very optimistic during the Q3 earnings call about long-term AI growth opportunities. As discussed below, AI momentum is stronger than expected. The growing adoption of AI consumer models is driving strong demand for AI chips. Similarly, enterprise AI demand is strong, and the rising sovereign AI opportunity will become another strong growth driver.

TSMC: AI Accelerator Growth to Hit Mid-40% CAGR by 2029

Management commentary suggested the chipmaker’s AI outlook through 2029 may be revised higher than the previously-guided mid-40% CAGR, though TSMC declined to provide an updated figure, opting to hold off until early 2026: 

“AI demand actually continues to be very strong, [it's] stronger than we thought 3 months ago, okay? So in today's situation, we have talked to customers and then we talk to customers' customer. 

So the CAGR we previously we announced is about mid-40s. It's [still] a little bit better than that. We will update you probably in beginning of next year so we have a more clear picture. Today, the [numbers] are insane.” 

TSMC Reports Softer HPC Growth After Historic Q2 Gains

TSMC reported a softer QoQ increase in HPC revenue in Q3 after the chipmaker posted its largest sequential growth in Q2 at nearly $3 billion. Q3 saw sequential growth of just over ~$800 million in USD terms, or ~5% QoQ, versus over 20% QoQ growth seen in Q2. However, Q3’s USD-visible growth continued to be inflated by forex, as HPC revenue in NTD was approximately flat QoQ at ~NT$564 billion, versus over 13% growth in Q2.

However, upon looking closer, HPC also saw its percentage of total revenue decline three points from Q2 to Q3, from 60% of total revenue to 57%. Meanwhile, smartphone revenue came in quite strong, gaining three points in total revenue to 30% share as revenue surged nearly 23% QoQ to $9.9 billion.

The softness in HPC revenue may stem from the upcoming platform shift to Nvidia’s Rubin architecture, which relies on a customized 3nm node, N3P, whereas Blackwell relies on TSMC’s N4P process, a customized 5nm node. As you can see in the chart below, TSMC reported a decline in HPC QoQ and YoY revenue at the time that Nvidia’s previous generation Hopper began to ship around Q1 2023. The decline persisted for a few quarters before TSMC resumed very strong QoQ growth in early 2024.  

HPC revenue grew 57% YoY and 5% QoQ in Q3 2025, easing from record sequential gains in Q2 as demand pauses ahead of Nvidia’s Rubin ramp.

Nvidia’s upcoming Rubin generation is slated to be released in the second half of 2026 as six variations entered trial production in August. According to CFO Collette Kress, "The chips of the Rubin platform are in the fab. The Vera CPU, Rubin GPU, CX9 Super NIC, NVLink 144 scale-up switch, Spectrum X scale-out and scale-across switch, and the silicon photonics processor [for co-packages optics]. Rubin remains on schedule for volume production next year.” 

According to Tom’s Hardware, Nvidia and its partners have “successfully created the photomasks and put Nvidia's Rubin GPU, Vera CPU, and various scale-up and scale-out switching ASICs to production.” The article states that Nvidia is now awaiting them to verify performance, power and other criteria.  

Although TSMC serves many high-profile customers in its HPC segment, such as AMD, Broadcom and Intel, it goes without saying that Nvidia is the heavyweight driving the larger swings in this segment as Nvidia has 10X AI revenue in the $200B range compared to second-place Broadcom in the $20B-ish range. As Tom’s Hardware estimates, it could take 9-12 months or longer for Rubin to enter production.  

Meanwhile, TSMC will likely report a lull in the HPC segment between the Blackwell and Rubin generations as Nvidia represents the lion’s share of this segment. 

TSMC’s Q3 EPS Surges 50.5% Year-over-Year, Beating Estimates by Over 12%

As much as TSMC is a top-line story, it is equally a bottom-line story. The company’s EPS grew by 50.5% YoY to $2.92, beating estimates by an impressive 12.3% with the strongest beat in the last two years.  

Analysts expect Q4 EPS to grow 26.8% YoY to $2.84 in Q4 and grow 25.5% in Q1. Looking forward, they expect EPS to grow 19.8% YoY to 12.34 in 2026 and 24.6% YoY to $15.48 in 2027. Due to TSMC’s economies of scale, the margin dilution from overseas fab expansion is expected to be 1%-2% in 2025, lower than their initial estimate of 2% to 3%.

TSMC’s Q3 EPS rose 50.5% year-over-year to $2.92, marking its strongest beat in two years and exceeding analyst estimates by 12.3%, driven by cost efficiency and economies of scale.

TSMC Stock Trades at Very High Valuation 

Despite TSMC’s strong bottom line growth, the stock trades at one of the highest bottom line valuations since the AI boom began. As visible below, even the strong fiscal Q3 EPS beat of 12.3 points and strong forward EPS guide is not making a dent in the stretched valuation.  

Source: YCharts 

The AI trade has been particularly hard to nail on valuations. For example, we see some stocks such as Palantir trading as high as 100 forward PS, there are long-standing stocks like Broadcom trading higher than it ever has in its history and it seems there are new deals being announced every day followed by 20%+ pops. 

Regarding TSM, it’s up 290% since early 2023 while the Nasdaq is up 127% and market favorites like Apple are up 98%. There is no denying that TSMC has been as strong performer as it’s the common denominator across the AI accelerator supply chain.  

Below we look at the following to determine how to approach the combination of a strong AI stock with a high valuation:

• The top reason that TSMC has seen strong price action and what must happen for the strong price action to continue 
• How to weigh the United States providing more funding to Intel (to date) compared to TSMC 
• A new trade setup for TSM now that our original trade plan has played out as described last June