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Taiwan Semi (TSM +13%) is looking quite chipper today. The world's largest contract chipmaker is up sharply following a robust Q3 report this morning, which is fueling a rise in other semiconductor (AVGO +3%, ARM +2.6%, MU +2.3%, NVDA +2.3%, ADI +1.6%) and semi equipment (AMAT +1.5%, LRCX +1.1%) names today. This marked TSM's first double-digit EPS beat in the past year. Revenue in Q3 rose 36% yr/yr and 12.9% sequentially to US$23.5 bln, which was above the high end of prior guidance of US$22.4-23.2 bln.

• What was even more impressive was the strong upside guidance for Q4. TSM expects Q4 revenue of $26.1-26.9 bln, which was well above analyst expectations. Margins were another bright spot with operating margin of 47.5%, which was well above prior guidance of 42.5-44.5%. TSM also guided to robust Q4 operating margin of 46.5-48.5%.
• Its Q3 results were supported by strong smartphone and AI-related demand. Moving into Q4, TSM expects its business to continue to be supported by strong demand for its leading edge process technologies. TSM continues to see extremely robust AI-related demand from customers throughout 2H24. It now forecasts the revenue contribution from server AI processors to more than triple this year and account for a mid-teen percentage of total revenue in 2024.
• By product, 3-nanometer process technology contributed 20% of wafer revenue in Q3, while 5nm and 7nm accounted for 32% and 17%, respectively. Advanced technologies, defined as 7-nm and below, accounted for 69% of wafer revenue. By platform, HPC increased 11% sequentially to account for 51% of Q3 revs. Smartphone increased 16% to account for 34%. IoT increased 35% to account for 7%. Automotive increased 6% to account for 5%. DCE decreased 19% to account for 1%.
• Turning to its global manufacturing footprint, TSM is expanding into new geographies. In Arizona, TSM has received strong commitments from US customers and US federal, state and city governments. TSM has made significant progress in the past several months. TSM's plan is to build three fabs in Arizona with the first fab expected to reach volume production in the beginning of 2025. The second fab is scheduled for chip production in 2028. With 68% of 2023 revs coming from North America, building fabs in Arizona makes sense. TSM is also expanding in Japan.

Overall, this was an impressive Q3 report for Taiwan Semi with its upside results and strong margins. But what really stood out was the Q4 guidance for revenue and margins. Any fear that AI-related demand might be waning or overdone was put to bed with this guidance and commentary. Also, Taiwan Semi is a behemoth, so if it is seeing robust AI demand, you can be sure others are as well. And that is particularly true for its customers, which include AMD, Amazon's AWS, AVGO, INTC, NVDA, NXPI, QCOM and Sony.

On a final note, names like NVDA get a lot of press attention, but we would argue TSM deserves to be mentioned in the same breath. Its stock has been a huge mover as well and it also is seeing huge AI-related demand and it sports some massive operating margins.