Wall Street comments on TSMC's financial report: "Slightly weaker" gross margin, unexpected increase in capital expenditure boosts confidence in the AI supply chain.

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TSMC has once again delivered a report card that exceeded expectations, providing a clear answer to the recent market debate on whether the AI investment cycle has peaked.

Not only did the company’s Q2 revenue and profit maintain high growth, it also made a rare and significant upward revision of its full-year revenue and capital expenditure guidance, and clearly stated that investment intensity will continue to increase in the coming years, signaling that AI demand is still in a rapid expansion phase.

For Wall Street, more important than single-quarter results is management’s outlook on future demand. With the upward adjustment of capital expenditure, further strengthened expectations for AI accelerator growth, and continued expansion of advanced production capacity, the market has again been validated on the duration of the AI infrastructure boom cycle.

Several investment banks believe that TSMC’s revised outlook for the year means not only stronger growth momentum for the company itself, but will also boost confidence across the entire AI semiconductor supply chain, benefiting sectors including semiconductor equipment, advanced packaging, and memory. Though the gross margin guidance is slightly below some optimistic expectations, institutions generally believe this mainly reflects temporary pressure from new process ramp-up and does not change the long-term upward logic of AI demand.

Steady performance, full-year growth outlook raised again

TSMC raised its capital expenditure guidance for 2026 from $52-56 billion to $60-64 billion, an increase of over 10%; its full-year USD revenue growth guidance was also lifted from “over 30%” to “over 40%,” significantly above the previous consensus of 35–40%.

Chairman Mark Liu stated at the earnings conference that AI demand remains “extremely strong” and announced an additional $100 billion investment in Arizona, USA, increasing the cumulative local investment to $265 billion.

UBS analyst Crystal Hsu said, TSMC’s rare mid-year increase in capital expenditure further boosts market confidence in the AI supply chain boom, and means that semiconductor equipment manufacturers stand to continue to benefit.

Gross margin slightly below optimistic expectations, but profitability remains at historical highs

Gross margin was 67.7%, slightly higher than the consensus 67.6%, but below JPMorgan’s previous forecast of 69.5%. Operating margin broke through 60% for the first time, reaching 60.3%, up more than 10 percentage points year-on-year; earnings per share were NT$27.25, about 10% higher than JPMorgan’s forecast.

Charlie Chan, an analyst at Morgan Stanley, pointed out that gross margin was below some high market expectations, due primarily to early depreciation for 2nm processes and dilution effects from overseas fab ramp-ups. JPMorgan characterized this as a one-off reset of profit margins, but believes the long-term gross margin can stabilize above 60%.

Regarding the outlook for Q3, the company expects revenue to grow sequentially by about 12%, within Morgan Stanley’s previously forecasted range of 10–15%. JPMorgan expects that mass production of 2nm in the second half will put about 300–400 basis points of gross margin pressure, but ongoing improvement in 3nm product profitability will partly offset this impact. Morgan Stanley noted, TSMC’s Q3 gross margin guidance is 66%, below its own forecast of 67.5% and not reaching some buy-side institutions’ optimistic estimates close to 70%.

Even so, both institutions believe this will not alter TSMC’s long-term growth logic, and suggest investors take advantage of expected profit margin adjustments and price volatility to buy on dips. JPMorgan expects that with the full-year revenue guidance raised, markets may lift TSMC’s 2026 EPS forecast by 2–3%, with more significant upside for forecasts in 2027–2028.

UBS also said, though TSMC’s profitability guidance is relatively conservative, the market generally believes management prefers to prioritize customer relationships and to smooth margins through subsequent product mix optimization, with no change to the long-term fundamentals.

Significant increase in capital expenditure, AI demand visibility extends to 2030

The most watched item this time is the large increase in capital expenditure. CFO Wendell Huang stated that the company remains highly confident in the long-term AI trend, with capital spending over the next three years set to be significantly higher than the previous three years.

UBS noted that TSMC has rarely raised full-year capital spending in Q2 historically, making this adjustment especially significant. JPMorgan believes this round of capital spending is mainly for early equipment procurement, expansion of 3nm and 5nm capacity, building new fabs, and addressing rising equipment prices.

Although TSMC has not disclosed specific capital expenditure amounts for the next three years, management has clearly stated capital investment will further increase, implying JPMorgan’s current estimates of $78 billion for 2027 and $84 billion for 2028 may still have room for upward revision.

Demand side is also sending positive signals. Management noted that cloud customers continue to increase capital spending, and the AI accelerator business’ compound growth trajectory from 2024 to 2029 has already exceeded previous forecasts of a high mid-50% rate.

JPMorgan believes that from client orders and terminal demand, new demand driven by Agentic AI is rapidly spreading, covering not just AI accelerators but also CPUs, networking chips, HBM and other infrastructure, and that the associated boom cycle could extend to 2029–2030.

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