ASML and TSMC: AI Demand Is Outpacing Chip Production
On Wednesday and Thursday, we got earnings reports from the semiconductor industry. And not just from any companies.
On Wednesday, ASML reported its results. The company manufactures the machines used to produce chips. And yesterday, it was TSMC's turn, the world's largest contract chip manufacturer.
Two different links in the same supply chain. Yet both delivered almost exactly the same message. Demand driven by artificial intelligence is exceeding what they can produce.
In fact, some of ASML's customers are already discussing orders for 2029 and 2030. Yes, you read that correctly.
ASML
Let's start with ASML. Earnings per share came in at €12.93, beating analysts' expectations by €2.14. Net profit reached €4.96 billion, while the gross margin came in at 57.5%.
Revenue reached €11.66 billion, up 55.1% year over year. However, it came in €70 million below estimates.
"So, were the results good or bad in the end?" you might be wondering.
I'd say they were excellent. However, Seeking Alpha analyst Julia Ostian explains that earnings were partly boosted by an extraordinary investment gain. On the other hand, the revenue shortfall was small relative to the company's size. And the stock? It fell, with the decline continuing yesterday, before eventually closing down 4.19%.
The company also announced an interim dividend of €1.88 per share, payable on November 4. During the quarter, it repurchased €4.1 billion worth of its own shares.
DEMAND IS OUTPACING PRODUCTION
But the most interesting part was what lies ahead.
For the fourth quarter, ASML expects revenue of €14.2 billion to €15.2 billion, with a gross margin of around 57%. Analysts had expected €14.11 billion.
For the full year 2026, it raised its revenue forecast to €44 billion to €45 billion, up from a previous range of €43 billion to €45 billion, with a gross margin of around 56%.
And this is where things get even more interesting. ASML says demand will exceed its production capacity in both 2027 and 2028. The company had already planned to increase production by 30% each year. That won't be enough.
"It is becoming very clear that 30% in 2027 and another 30% in 2028 will not allow us to meet our customers' demand," CEO Christophe Fouquet said.
That's why the company is looking for ways to expand production even further.
What does this mean? According to Ostian, the only thing holding ASML back is the number of machines it can manufacture. "The best problem a monopoly can have."
Citi adds that the conversation has now shifted toward 2028 and beyond, as well as how much further profit margins can rise.
What's more, according to reports, ASML will increase prices for spare parts supplied to Samsung and SK Hynix by 10%. Chief Financial Officer Roger Dassen said price increases will become visible from 2027.
Of course, there is one major caveat: China.
China accounted for 23% of ASML's machine sales during the quarter, up from 14% previously. This leaves the company exposed to stricter export restrictions.
In the United States, lawmakers are proposing the MATCH Act, which would restrict sales of DUV lithography machines to China.
ASML opposes the move. Its argument is that such restrictions could actually help China develop its own technology more quickly.
TSMC POSTS ITS SIXTH CONSECUTIVE RECORD QUARTER
Now let's turn to the second company. Yesterday was TSMC's turn, and there was nothing mixed about these results.
Revenue reached $46.36 billion, exceeding expectations. Net profit came in at 763.1 billion Taiwanese dollars, compared with analysts' expectations of 746.34 billion.
That represents a 68.7% increase year over year and marks a record profit for the sixth consecutive quarter.
But that's not all. The operating margin reached 58.7%, exceeding even TSMC's own upper-end forecast of 58%.
You might ask, what does that tell us?
Put simply, TSMC can maintain high prices as AI continues to drive demand for chips.
Free cash flow reached 476.56 billion Taiwanese dollars, up from 139.38 billion a year earlier. That's more than triple the previous year's figure.
Where is all this money coming from?
Three-nanometer chips accounted for 33% of revenue. All advanced chips combined, meaning those manufactured using processes of seven nanometers or smaller, accounted for 79% of wafer revenue.
By end market, high-performance computing came first at 68%, followed by smartphones at 21%.
Automotive chips, however, grew faster than any other category, rising 23% quarter over quarter.
Shareholders will also receive a dividend of 7 Taiwanese dollars per share for the second quarter.
WHAT COMES NEXT?
For the fourth quarter, TSMC expects revenue of $52.3 billion to $54.3 billion.
At the midpoint, that would represent a 14% increase over the third quarter and a 58% increase year over year. Growth will be supported by demand for its advanced technologies and the ramp-up of two-nanometer chip production.
The company also raised its full-year forecast.
This is where capital expenditure comes into play, meaning the money the company spends on factories and equipment.
Capital expenditure from 2026 through 2028 will be significantly higher than during the previous three-year period.
You might be wondering: is TSMC taking too much risk?
Sravan Kundojjala of SemiAnalysis says the company is proceeding cautiously. It checks whether its customers have the financing and components needed to build AI systems.
"Even after these checks, TSMC says demand remains significantly above its production capacity," he notes.
In short, two companies, one message: demand is growing faster than factories can produce.
