TSMC stock drops despite record profit amid 'extremely robust demand' for AI chips

Taiwan Semiconductor Manufacturing Company's ( TSM ) shares fell 2% despite strong quarterly results as a sector-wide sell-off weighed on the contract chipmaker.

TSMC reported a sixth straight quarter of record profits, with the company's bottom line jumping nearly 69% while revenue surged 51%.

The Taiwan-based contract chip manufacturer's sales are expected to reach as much as $54.3 billion for its current quarter, beating analyst estimates.

"Demand for our leading-edge technologies continue to be extremely robust," TSMC CEO C.C. Wei said during the call. "We observe increasing AI demand fueled by the rising adoption of agentic AI as we transition from chatbot to AI assistance."

Third quarter gross margin was 66.4%, down from 67.7% in the second quarter. TSMC expects a gross margin of 65% to 67% for the fourth quarter.

"Given the continued robust multi-year demand from our customers, including the emerging agentic AI market, we reiterate our full-year 2026 capital budget to be between $60 billion and $64 billion," TSMC CFO Wendell Huang said.

The company expects capital expenditures from 2026 to 2028 "to be even more significantly higher than the past three years," as it continues to invest heavily to support customers' growth, Huang added.

The company is closely tied to the AI infrastructure build-out and its execution, as it manufactures advanced processors designed by chip giants such as Nvidia ( NVDA ), AMD ( AMD ), and Broadcom ( AVGO ).

TSMC stock is up more than 41% year to date as of Wednesday's close. Shares reached all-time highs earlier this month after Tesla ( TSLA ) and SpaceX ( SPCX ) CEO Elon Musk acknowledged early-stage talks with the world's largest chip foundry about a potential collaboration on his Terafab semiconductor initiative in Texas.

TSMC, which is already undergoing significant expansion in Arizona as part of a multiyear plan to manufacture chips stateside for its clients, confirmed it is exploring Texas.

"We send the teams to Texas to do all the evaluation," Wei said during the call. "We also talk to one of our customers who try to build a fab, Terafab, let me be more specific."

Ines Ferre is a senior business reporter for Yahoo Finance.