Record Margins, AI Demand Still Accelerating
TSMC (NSDQ:TSM) continues to show real pricing power. Demand is clearly accelerating in advanced semiconductor nodes below 7nm, and that is exactly where TSMC’s competitive edge is strongest. Any mega-cap hyperscaler that wants to design its own custom advanced chips still has to go through TSMC to manufacture them, and the company’s profitability makes that very clear.
What also stood out to us is how this lines up with the broader semiconductor chain. Demand is not just flowing to the chip designers. It is also supporting the equipment makers that enable this buildout in the first place. TSMC’s 58% operating margin is a strong signal that advanced chip manufacturing remains in very high demand.
The bigger takeaway is that both ASML and TSMC are lifting FY26 revenue guidance. That tells us the demand cycle is still strong this year, and the industry backdrop remains supportive for the highest-quality names in the semiconductor stack.
Demand Accelerates March Alone Hits $13.1 Billion
TSMC delivered $35.9 billion in Q1 revenue, up 40% YoY, marking one of the strongest quarters in the company’s history. That strength was driven by advanced manufacturing nodes, which remain the core engine of growth.
March was especially strong. Revenue reached $13 billion, up 45% YoY and 30% from February. For a company of TSMC’s size, that is an exceptional result and a clear sign that the AI silicon demand cycle has not yet hit any real plateau.
One point investors should keep in mind is that every mega-cap tech company is now racing to build better and more differentiated chips. That competitive pressure plays directly into TSMC’s hands.
Its leadership in 3nm and 5nm manufacturing means it is capturing the capex flowing from customers like Nvidia with Blackwell, Amazon with Trainium, and Apple with its M-series chips. As the inference buildout gathers pace, TSMC remains one of the clearest beneficiaries.
Margins Hit Multi-Year Highs Every Line Expands
But the real focus needs to be on margins, because they tell us a lot about the quality of this business.
One of the key points from yesterday’s ASML piece was that operating costs are relatively fixed. As demand rises, the cost base does not grow at the same rate. Scale starts to do the heavy lifting. TSMC has the same economic profile.
When revenue grows 40%, the fixed cost per wafer falls sharply. That is exactly what we are seeing here. COGS fell from 41.2% to 33.8% of revenue YoY, which accounts for essentially all of the gross margin expansion.
This is textbook operating leverage in a capital-intensive business. Once utilisation rises, a larger share of each extra dollar of revenue drops through to profit. That is why TSMC’s margin profile matters just as much as its top-line growth.
Advanced Nodes Now 74% of Revenue
As we touched on earlier, a big reason TSMC is now generating close to $20 billion in profit is the structural tailwind behind advanced node demand. No other manufacturer in the world can produce leading-edge chips at TSMC’s scale.
That matters because 3nm now makes up 25% of wafer revenue. This is the newest and most expensive capacity in the network, and it is being used for products like Apple’s A18 Pro, Nvidia’s next-generation AI accelerators, and a growing number of custom silicon programs.
This is exactly why profitability is lifting. It is not just volume growth. It is the mix shift toward higher-value manufacturing, where TSMC has clear pricing power.
More broadly, advanced technologies at 74% of revenue, meaning 7nm and below, are now a structural margin driver for the business.
TSM The multi-year computer
We have held TSMC in our portfolio for close to two years, and the long-term trajectory still looks very attractive. But that does not mean the story is without risk.
The obvious issue investors know well is China. That risk has not gone away, and it remains one of the biggest overhangs on the stock.
Investors also need to watch what happens as TSMC builds out new fabs in the US and Germany. Those projects are strategically important, but they could put some pressure on gross margins as the company expands manufacturing outside its core Taiwan base.
The other point worth keeping in mind is valuation. TSMC is still a cyclical business, even if the long-term demand outlook is strong. The best time to buy these kinds of names is usually when the cycle cools, sentiment weakens, and the valuation multiple compresses.
That is why we would be careful about chasing the stock at the top of a capex supercycle. The long-run story can stay intact while the share price still goes through a tougher period if the cycle turns.
