TSMC stock drops after Q2 beat as $100bn capex hike spooks investors
Taiwan Semiconductor reported strong second-quarter earnings but saw its shares fall as a massive increase in capital spending raised investor doubts about the long-term returns of the AI boom.
Taiwan Semiconductor Manufacturing posted second-quarter results on Thursday that easily surpassed expectations. However, the chipmaker's shares declined as investors fixated on a sharp upward revision to its capital expenditure plans.
The company now expects to spend between $60 billion and $64 billion this year, up from a prior range of $52 billion to $56 billion. This includes a fresh $100 billion commitment to construct new manufacturing facilities in Arizona, adding to an existing $165 billion slated for U.S. operations.
Management offered few specifics on the Arizona expansion but confirmed that total production capacity will ramp up significantly in the second half of 2026 and beyond. The market's apprehension stems from questions about the durability of the artificial intelligence infrastructure build-out.
High-performance computing, driven primarily by AI data center chips, represented two-thirds of TSMC's revenue last quarter. While it remains the company's fastest-growing end market, investors are weighing whether this demand justifies such an enormous upfront investment.
That skepticism may be overlooking the company's current financial momentum and pricing leverage. Management forecast full-year revenue growth exceeding 40%, a pace that underscores the immediate profitability of the AI cycle.
TSMC's gross margin hit 67.7% in the quarter, up 9.1 percentage points year-over-year, while operating margin reached 60.3%, an improvement of 10.7 percentage points. These margins reflect an unmatched ability to produce cutting-edge chips at massive scale with low defect rates.
This technological advantage translates directly into pricing power, with the foundry raising prices at the beginning of the year and implementing another increase last month. Profitability on its 3-nanometer process continues to improve, even as the company prepares for the ramp-up of its 2-nanometer technology, which is progressing ahead of schedule.
For market participants, the central question is whether TSMC's aggressive capital deployment will dilute returns or secure an even wider moat against potential rivals. The current sell-off highlights a fundamental tension between near-term balance sheet caution and a structural monopoly in advanced chipmaking that continues to generate historically high cash flows.
