The Market's True Earnings Expectations

TSMC enters its third-quarter report with an awkward kind of problem: demand is so strong that the costs of meeting it are starting to show up in the margin line. Management raised its full-year growth target for the third straight quarter last time and called AI demand essentially insatiable. It also warned that the steep ramp of its N2 process would pull gross margin lower. The October 15 release, due before the open, is the first real test of whether revenue momentum can absorb that dilution without disappointing a market that has already priced in a great deal of good news.

The Street is looking for earnings of $4.45 per share on revenue of $45.65 billion. That would mean growth of roughly 52% in earnings and 38% in revenue from a year ago, an exceptional pace for a company of this size. Management guided to revenue of $44.6 billion to $45.8 billion. When that range was issued, consensus sat well below it, near $42.6 billion. Analysts have since chased the number up to the top of the range. In other words, a result merely at the midpoint would now look like a soft quarter. TSMC has a habit of landing at or above the upper end, but the cushion is thinner than usual.