The release of ChatGPT in late 2022 kicked off an artificial intelligence (AI) boom that continues to this day. Advances in generative AI have fueled a tidal wave of adoption across consumer and business use cases. These advanced algorithms can generate original content, streamline repetitive tasks, write and debug computer code, target advertising, and more.
Nvidia (NVDA 1.28%) and Broadcom (AVGO 1.21%) were among the earliest companies to recognize the vast potential of AI and focused their resources to meet the growing demand. That decision was prescient, as their stocks have since gained 1,000% and 530%, respectively (as of this writing).
In recent months, however, investors have become more cautious, concerned that the slowing relative growth and circular deals signal an AI bubble and that the AI boom is about to go bust. However, Taiwan Semiconductor Manufacturing (TSM 4.25%), commonly known as TSMC, is the world's largest contract chipmaker, and it just delivered some fantastic news that could help put some of those fears to rest.
Image source: Taiwan Semiconductor Manufacturing.
AI demand remains strong
Expectations were high heading into TSMC's fourth-quarter financial report, but the results show that demand for AI-capable chips remains strong. Revenue of $33.7 billion jumped 26% year over year and 2% sequentially. This drove earnings per American depositary receipt (ADR) of $3.14 up 35%.
The results were driven higher by the company's leading-edge process technologies, as 3-nanometer (nm) wafers -- the most advanced chips on the market -- accounted for 28% of revenue, while 5nm wafers made up 35%. TSMC noted that high-performance computing (HPC) generated 55% of total sales.
More telling was the company's exploding margins as TSMC leverages its expertise to answer runaway demand. The company's gross profit margin expanded to 62.3%, up from 59% in the prior-year period, operating margin climbed to 54% from 49%, and net profit margin soared to 48% from 43.1%.
NYSE: TSM
Key Data Points
TSMC expects the AI-induced growth spurt to continue. Management's forecast is calling for first-quarter revenue in a range of $34.6 billion to $35.8 billion, up from $25.53 billion in the prior-year quarter, which would represent growth of 38% at the midpoint of its guidance.
Scrambling to meet the demand
Perhaps the most intriguing announcement was that TSMC plans to significantly increase its capital expenditures (capex) to keep up with the surging demand. The company plans to spend between $52 billion and $56 billion, well ahead of Wall Street's expectations of $41 billion and marking a significant increase from the $41 billion it spent in 2025. This jump in capex spending, which will boost existing production capacity, signals management's confidence that the strong demand for AI chips will continue.
NASDAQ: NVDA
Key Data Points
This development follows media reports suggesting that several high-profile customers, including Nvidia and Broadcom, have asked TSMC to boost production in recent months, as their supply remains capacity-constrained. The shortage of AI-capable chips has been well documented and is expected to last well into next year.
The decision by TSMC to significantly increase capex spending and the resulting increase in production capacity will increase the supply of AI-capable chips.
What this means for Nvidia and Broadcom
While the robust results and rising investments in production capacity are obviously good news for TSMC investors, they also have broader implications for the state of AI. It also spells good news for Nvidia and Broadcom.
NASDAQ: AVGO
Key Data Points
First and foremost, this is clear evidence that the AI boom is alive and well. TSMC has its finger on the pulse of the semiconductor industry. Its willingness to increase capex by 37% shows that management is confident that demand for AI will continue.
Moreover, reports from numerous big tech companies suggest demand for AI chips is far outstripping supply. For example, Microsoft CFO Amy Hood recently said that despite rising capex spending, "We now expect to be capacity constrained through at least the end of our fiscal year, with demand exceeding current infrastructure build-out, resulting in lost revenue opportunities for Azure in fiscal Q1 2026." This helps to illustrate the limited supply of Nvidia's graphics processing units (GPUs) and Broadcom's application-specific integrated circuits (ASICs), both of which are in high demand thanks to AI.
The fact that TSMC plans to increase production capacity should be music to the ears of Nvidia and Broadcom shareholders. Increased production capacity will likely translate to a growing supply of AI chips, fueling greater revenue and profit growth.
Finally, both Nvidia and Broadcom are attractively priced, with both selling for less than 25 times next year's expected sales.
