NVIDIANVDA may dominate the AI chip headlines, but investors looking for another way to capitalize on the artificial intelligence boom should not overlook Taiwan Semiconductor Manufacturing CompanyTSM or TSMC. The world's leading contract chipmaker is benefiting from surging demand for advanced semiconductors, with third-quarter 2026 revenues rising 41.2% year over year. The company expects full-year revenue growth of approximately 44% in U.S. dollars, supported by robust AI demand and the ramp-up of next-generation 2-nanometer technology. With demand spanning AI accelerators, agentic AI and networking chips, TSMC offers investors a promising opportunity to participate in AI growth beyond NVIDIA.
TSMC's Q3 Results Show Strong Growth Momentum
TSMC's third-quarter 2026 revenues were up 16.2% sequentially. Net income increased 68.7% year over year while earnings per American depositary receipt (ADR) reached $4.60.
Profitability remained robust, with gross margin of 66.4%, which expanded 690 basis points (bps) from the year-ago quarter. Operating margin of 58.7% expanded 810 bps year over year. Net profit margin was 51.1%. Advanced technologies, defined as 7-nanometer and more advanced processes, accounted for 79% of wafer revenues.
Image Source: Zacks Investment Research
High-performance computing (HPC), which includes processors used in AI and other demanding computing applications, remained TSMC's largest platform. HPC revenues rose 22% sequentially and accounted for 68% of third-quarter revenues.
AI Demand and 2-Nanometer Production Drive the Outlook
TSMC expects fourth-quarter 2026 revenues of $52.3 billion to $54.3 billion, representing approximately 14% sequential growth at the midpoint from third-quarter revenues.
Management raised its full-year 2026 revenue growth outlook to approximately 44% year over year in U.S. dollar terms. CEO C.C. Wei said demand for leading-edge technologies remained extremely robust, supported by technology differentiation and a broad customer base.
TSM expects gross margin of 65%-67% and operating margin of 56.5%-58.5% in the fourth quarter. It also indicated that overseas expansion could increase margin dilution over the next few years.
The company also noted growing adoption of agentic AI, open-source AI models, AI accelerators and networking chips. The company expects these developments to support demand for advanced silicon.
The 2-nanometer manufacturing ramp is another important growth driver. The technology contributed 8% of wafer revenues in the third quarter and management expects its ramp-up to support fourth-quarter performance. TSMC also expects annual capacity for its N2 family of technologies to more than double in 2027, supported by demand from smartphones and HPC applications.
TSMC is also working with ASML HoldingASML to advance next-generation chipmaking technology. In September 2026, the companies announced an industry initiative to transition to 12-inch photomasks for high-numerical-aperture (High-NA) extreme ultraviolet (EUV) lithography. The initiative targets a pilot line by 2031, with advanced-node production readiness targeted for 2033. The larger photomasks are expected to improve manufacturing productivity and reduce chipmaking costs, supporting the industry's longer-term push toward more advanced semiconductors.
TSMC Earnings Estimate Revisions Chart
Image Source: Zacks Investment Research
Heavy Capital Spending Supports Expansion but Creates Risks
TSMC plans to spend $60 billion to $64 billion on capital expenditures in 2026. Management expects investment during 2026-2028 to be significantly higher than in the preceding three years as the company expands capacity to meet customer demand.
The increasingly negative values in the chart below reflect rising capital outflows, showing the company's substantial investment commitments as it prepares to meet growing demand for AI chips.
Image Source: Zacks Investment Research
TSMC vs. NVIDIA: Two Different AI Growth Opportunities
NVIDIA reported fiscal second-quarter 2027 revenues of $96.2 billion, up 106% year over year. Data Center revenues increased 117% to $89 billion. The company forecast third-quarter revenues of $108 billion, plus or minus 2%.
These figures demonstrate that NVIDIA remains a powerful AI growth story. Its GPU architecture, CUDA software ecosystem and integrated computing platform differentiate its business from TSMC's.
TSMC, by contrast, manufactures advanced chips for NVIDIA and other customers. Its investment case rests on semiconductor production demand across multiple designers and end markets, rather than the success of a single chip platform.
Is TSMC Stock Worth Buying Now?
TSMC's strong third-quarter performance, upgraded outlook and expanding 2-nanometer business strengthen its growth prospects. Moreover, its Zacks Rank #1 (Strong Buy) reflects positive earnings estimate revisions, making the stock a candidate for investors seeking exposure to the AI semiconductor boom. However, buying TSMC as an alternative way to participate in AI growth is different from expecting it to replace NVIDIA in a portfolio.
NVIDIA remains a dominant AI computing platform provider, while TSMC benefits from manufacturing advanced chips for multiple customers. Rather than viewing the two stocks as substitutes, investors should evaluate their distinct growth drivers and risk profiles. TSMC's strong outlook makes it worth considering now, although its capital intensity and geopolitical exposure remain important risks. You can see the complete list of today's Zacks #1 Rank stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Taiwan Semiconductor Manufacturing Company Ltd. (TSM) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
ASML Holding N.V. (ASML) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
