Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) just delivered the kind of quarter that makes investors happy and skeptics uncomfortable. The world's most important chipmaker reported fourth-quarter results Thursday that sailed past expectations, powered by relentless global demand for the advanced processors that make artificial intelligence actually work.

Here's the thing about Taiwan Semi: if you use any cutting-edge tech, you're probably using their chips. They're the supplier behind Nvidia Corp. (NVDA)'s powerful graphics processing units and Apple Inc. (AAPL)'s smartphones. When they post strong numbers, it tells you something real about what's happening in the tech ecosystem.

And these numbers were strong. Quarterly net sales came in at $33.73 billion (1.05 trillion New Taiwanese dollars), up 20.5% from last year and topping the analyst consensus of $33.27 billion. Quarter-over-quarter, sales grew 5.7%. Net income and earnings per share hit $16.31 billion (505.74 billion New Taiwanese dollars) and $3.14, respectively—a 35% jump year-over-year that crushed the analyst estimate of $2.79 per share.

In U.S. dollar terms, revenue climbed 25.5% year-over-year and 1.9% sequentially. That performance exceeded the company's own guidance range of $32.2 billion to $33.4 billion. The company also laid out an optimistic revenue forecast for the first quarter of 2026 that suggests this momentum isn't slowing down.

Where the Money's Coming From

The revenue breakdown tells the AI story pretty clearly. The company's most advanced 3-nanometer technologies accounted for 28% of total revenue, while 5-nanometer tech grabbed 35% and 7-nanometer took 14%. Put it all together and advanced technologies—7nm and below—represented 77% of total wafer revenue. This is where the cutting-edge AI chips live.

By platform, High-Performance Computing represented 55% of net revenue and smartphones made up 32%. IoT, Automotive, DCE, and other applications each contributed 5%, 5%, 1%, and 2%, respectively. Translation: AI computing and high-end phones are driving the business.

Geographically, North America dominated with 74% of total net revenue in the fourth quarter. Asia Pacific, China, Japan, and EMEA (Europe, the Middle East, and Africa) accounted for 9%, 9%, 4%, and 4%, respectively. That North American concentration reflects where the big tech companies buying AI chips are headquartered.

The Profitability Picture

Taiwan Semiconductor's technology advantage isn't just driving revenue—it's expanding margins in a big way. Quarterly gross margins jumped 330 basis points to 62.3%, well above the company's guidance of 59.0% to 61.0%. The expansion came from higher capacity utilization rates and ongoing cost improvements.

Operating margin expanded a whopping 5000 basis points to 54.0%, crushing the company's outlook of 49.0% to 51.0%. When your margins are expanding like that, you've got serious pricing power.

Free cash flow increased by 229.22 billion New Taiwanese dollars to an inflow of 368.60 billion New Taiwanese dollars in the quarter, as operating cash flow growth outpaced the increase in capital spending. The company closed the quarter sitting on 3.1 trillion New Taiwanese dollars, or roughly $98 billion, in cash and marketable securities.

Capital expenditures totaled $11.51 billion in the fourth quarter. The board also approved a 6.00 New Taiwanese dollars cash dividend for the third quarter of 2025.

The AI Bubble Question

Here's where things get interesting. Taiwan Semiconductor used its earnings call to directly address the growing chorus of voices wondering if AI demand is a bubble waiting to pop. Management made it clear they're not buying the skepticism.

CEO C.C. Wei said the company has gone straight to hyperscalers and their end customers to validate demand, and concluded that AI is a multi-year structural growth driver, not some short-term trend that's about to fizzle out. Customer demand remains strong across consumer, enterprise, and sovereign segments.

"All in all, I believe in my point of view, the AI is real. Not only real, it is starting to grow into our daily life. We believe that is kind of. We call it AI Megatrend," Wei said.

Capacity remains tight in the near term, but the company is tackling supply constraints through productivity improvements, higher utilization rates, and node optimization. They're also ramping up capital spending significantly to meet demand.

Taiwan Semi is accelerating its U.S. manufacturing expansion too, particularly in Arizona, positioning itself to support long-term AI and high-performance computing demand. Management expressed confidence in sustained revenue growth and profitability going forward.

What's Next

The company guided first-quarter 2026 revenue to $34.60 billion to $35.80 billion, handily beating the analyst consensus estimate of $32.52 billion. It expects gross margins of 63% to 65% and operating profit margins of 54% to 56%.

For the full year 2026, Taiwan Semi projects revenue growth of approximately 30% in U.S. dollar terms. That's aggressive guidance that reflects real confidence in continued AI demand.

The company is planning capital expenditures of $52-$56 billion in 2026, with 70-80% earmarked for advanced technologies. That's a massive investment, but it's what you do when you think the demand is real and lasting.

TSM Price Action: Taiwan Semiconductor shares jumped 5.26% to $344.30 during premarket trading Thursday, hitting a new 52-week high.