Analysts at Citibank believe the recent drop in TSMC shares on rumors of delays to NVIDIA's advanced artificial intelligence processor is overdone and that the chipmaker's outlook remains positive.

TSMC's shares plunged on Monday on media reports that NVIDIA's Blackwell AI processor could be delayed by three months or more due to design issues.

Given that NVIDIA is a key TSMC customer, this situation could put pressure on TSMC's earnings.

However, Citibank said that despite the possible delay in NVIDIA's Blackwell AI processor, overall demand for AI chips remains optimistic. And due to the novelty of the technology, any initial technical challenges will be temporary.

We expect TSMC's earnings growth to continue to be strong," Citi noted in a report. In addition to strong demand for AI GPUs/accelerators, we expect order momentum from CPUs and smartphone SoCs to remain steady."

TSMC recently reported posted higher-than-expected second quarter earnings and is optimistic about its full-year outlook, driven primarily by strong demand for AI.

Despite TSMC's solid earnings performance, the company's shares fell from the previous month's record highs due to widespread selling pressure in the tech sector. Over the past month, TSMC's shares have fallen 15%.

Despite TSMC's solid profits, other giants, including Microsoft, Alphabet and Arm Holdings, have reported mixed results, raising questions about how much AI is bringing in.

However, Citibank said the outlook for AI-driven demand remains strong for Nvidia, which makes some of the most advanced chips in the industry.