1 Reason TSMC Stock Could Rally After Its Record Quarter

Taiwan Semiconductor Manufacturing (TSM) stock has surged a remarkable 39% year-to-date, outpacing the S&P 500's 13% growth. As the world's largest contract chipmaker, TSMC just announced record quarterly revenue, reinforcing the potential for continued stock appreciation. However, the key driver behind this potential rally is the persistent demand for AI chips, which is outpacing TSMC's manufacturing capabilities.

In the third quarter, TSMC's revenue leapt 41% year-over-year to $46.7 billion, with high-performance computing, including AI data center chips, accounting for 68% of sales. Management anticipates fourth-quarter revenue between $52.3 billion and $54.3 billion, representing roughly 58% growth year-over-year. TSMC's management projects that AI accelerator sales will grow at a mid- to high-50s percentage rate annually through 2029.

During the Oct. 15 earnings call, Wei, TSMC's CEO, indicated that demand remains far above TSMC's current production capacity, suggesting the company may exceed its earnings forecasts. While rising component prices could negatively impact TSMC's smartphone business, which constituted 21% of third-quarter revenue, the surge in AI chip demand remains the primary growth engine for TSMC.

The stock trades at a reasonable valuation of about 19 times the estimated 2027 earnings, with Wall Street projecting earnings to grow at an annual rate of 38% over the next several years. This combination of high demand for AI chips and a potentially attractive valuation makes TSMC stock an enticing investment opportunity.