TSM: Outperforming 3Q25 on Strong AI Demand and Favorable FX Rate

6. The Q3 gross margin is expected to reach 59.0%, surpassing the high end of the 55.5%-57.5% guidance, driven by favorable foreign exchange rates and a rich AI product portfolio.

We forecast Q4 revenue guidance for low-to-mid single-digit QoQ growth, which is above the market consensus of flat to +1% QoQ. Consequently, we raise our 2025 USD revenue growth forecast to 36.4%, exceeding the company’s prior guidance of 30%. The Q4 gross margin is expected to edge up slightly QoQ to 59.2%. Our 2026 estimates are 0.8% and 7.6% above consensus on revenue and EPS, respectively, at NT4,369.6bn and NT72.26.

Upward Revision to 2026 CoWoS Capacity Expected to Ease Supply Constraints

Our checks indicate that TSMC will likely commit to a CoWoS capacity expansion for 2026, which should alleviate supply constraints for HPC clients. Nvidia has been requesting at least 800k CoWoS wafers for 2026. TSMC had previously been hesitant to expand aggressively due to equipment supply constraints and its prudent management style. We now model CoWoS capacity to increase from 670k in 2025 to 1,180k in 2026.

3Q25 Gross Margin Beat Driven by Favorable FX and Richer HPC Mix

While investors have been concerned about margin dilution from FX, trade tensions, and US fab expansion, we see several tailwinds.