This AI Chip Giant Could Be the Market’s Next Big Winner

Key Points

• Taiwan Semiconductor posted stronger-than-expected quarterly results, highlighting its pricing power and near-monopoly status in the semiconductor industry.
• The company reported 40.8% year-over-year revenue growth and 59.5% gross margins, both signaling robust fundamentals and improving shareholder returns.
• Analysts project upside potential, making TSM a lower-volatility play on the ongoing artificial intelligence and chip sector boom.

Talk of an artificial intelligence (AI) bubble has been on the rise among mainstream media and some executive commentaries. That’s a normal reaction to the bullish—parabolic even—price action in the technology sector, especially in the names involved with chip and semiconductor production. Yet amid the hype, there is one name that stands out as a disciplined and strategic way to play the trend.

After reporting better-than-expected quarterly earnings on Oct. 16, Taiwan Semiconductor Manufacturing NYSE: TSM stock began the trading day with a 0.5% rally.

But the real story lies under the hood: even with Wall Street expectations already sky-high, Taiwan Semiconductor managed to beat the Street, underscoring the strength of its business and its essential role in powering the AI revolution.

Breaking Down the Numbers: Taiwan Semiconductor’s Growth Engine

Double-digit percentage growth rates are typically seen in smaller companies. So when $1.2 trillion company posts a 40.8% growth in revenue over the past year, it's a different story.

This revenue jump reveals several key points for prospective or existing shareholders in Taiwan Semiconductor. First, pricing power remains intact despite recent geopolitical tensions in the space, particularly tariff uncertainty as the United States aims to onshore its semiconductor manufacturing footprint and capacity.

Secondly, TSM's near-monopoly status has accelerated its solid position in the industry. Management had estimated gross profit margins would be between 55.5% and 57.5%, but they ended up reporting a much higher 59.5%.

This ability to outperform and expand its margins will directly translate into shareholder gains, including higher net income margins and earnings per share (EPS), ultimately driving stronger valuations. Notably, the company’s net income margin climbed from 42.8% in the same quarter last year to 45.7% this quarter.

Given its current position, Taiwan Semiconductor has an open field to reallocate these earnings into further expansion and efficiency, as demonstrated by its return on equity (ROE) metric of 37.8%, which is above that of most other peers in the industry. For comparison, Advanced Micro Devices Inc. NASDAQ: AMD achieved an ROE of 4.7%.

The best part? These numbers are expected to improve, as management has now guided gross margins to be between 59% and 61% for the fourth quarter of 2025. This is directly accretive to the bottom-line EPS and ROE, further boosting the company’s valuation.

Analysts Raise the Bar After Blowout Quarter

TSM’s muted post-earnings rally might seem underwhelming at first, but the broader macro environment helps explain the reaction. The United States is still navigating a potential government shutdown and tensions remain high with China, particularly around rare earth metal exports.

However, not everyone on Wall Street is erring on the side of caution. Analysts have given TSM a consensus price target of $363.33, implying an increase of 20.4% from today’s price (not to mention a new all-time high).

One analyst, Susquehanna's Mehdi Hosseini, believes the stock has 32.5% upside potential, as evidenced by his price target increase from $300 to $400.

TSM offers a compelling mix of momentum and stability for investors looking to capitalize on AI and chip growth without the wild swings of smaller names. Its lower volatility profile, coupled with strong fundamentals and rising analyst targets, makes it one of the few AI-related stocks that could still have significant upside without the downside risk of newer, less-established peers.