Wall Street is firmly optimistic about TSMC's “throwing money”: the visibility of AI demand extends to 2030, and chip equipment stocks will benefit
The Zhitong Finance App learned that on July 16, TSM.US (TSM.US), a leading global foundry company, dropped a bombshell at the French conference — drastically raising the 2026 capital expenditure guidelines from 52 billion to 56 billion US dollars to 60 billion to 64 billion US dollars. Meanwhile, TSMC announced that it will invest an additional 100 billion US dollars in Arizona, bringing the total US investment commitment to 265 billion US dollars. The annual dollar revenue growth guide was further raised from “over 30%” to “slightly above 40%”. This increase in capital expenditure, which far exceeds market expectations, is viewed by Wall Street as a “strong shot” for the AI semiconductor supply chain, yet concerns about short-term profitability and free cash flow have caused the semiconductor sector to collectively plummet.
Capital expenditure “unexpectedly” increased drastically, and the visibility of AI demand extended to 2030
The increase in TSMC's capital expenditure this time far exceeded market expectations. Prior to the French press conference, many foreign investors originally estimated that TSMC could only be raised to the range of 56 billion to 58 billion US dollars at most, but the final announced upper limit of 64 billion US dollars “greatly exceeded market consensus.” TSMC Chairman Wei Zhejia said that demand for AI is still “extremely strong.” Chief Financial Officer Wong In-chiu emphasized during the performance call: “We have strong confidence in AI trends. Our capital expenditure over the next three years will be significantly higher than in the past three years.”
TSMC also revealed that it will continue to be deeply involved in Taiwan in the next few years, and is building 13 advanced process fabs and advanced packaging plants to support the long-term needs of AI, high-efficiency computing, and advanced manufacturing processes below 2 nm. The corporation believes that TSMC's simultaneous increase in capital expenditure and continued expansion of production means that AI demand has shifted from short-term rush orders to multi-year production expansion, and demand visibility has extended to 2030.
Analysts pointed out that TSMC remains confident about the AI megatrend as its customers and their customers — cloud service providers (CSPs) — continue to send strong signals of demand and show growth prospects over the years. Analysts added that although consumer and price-sensitive terminal markets (smartphones and PCs) still face challenges, TSMC is more focused on high-value AI accelerators and smart AI CPUs.
TSMC CEO Wei Zhejia explained that demand for capital expenditure increases mainly comes from two aspects: 1. Market demand continues to rise, and customers strongly demand that TSMC expand production capacity simultaneously; 2. Equipment inflation raises procurement costs. Bank of America analysts also pointed out, “TSMC believes there are no bottlenecks in capacity expansion. Management also stated that the increase in equipment prices was a driver of the increase in capital expenditure.”
Citi has previously raised TSMC's 2027 and 2028 capital expenditure forecasts to $75 billion and $80 billion, respectively. Goldman Sachs raised TSMC's target price to NT$3,000 and the ADR target price to $600 before the French conference.
TSMC's current increase not only means a further increase in its own growth momentum, but it will also boost confidence in the entire AI semiconductor industry chain — semiconductor equipment, advanced packaging, and storage are all expected to continue to benefit. The Wedbush analyst team also said that the growth in TSMC's capital expenditure is in line with Asmack's strong performance expectations announced yesterday, which is beneficial to the semiconductor capital equipment industry as a whole.
Wall Street is optimistic: equipment vendors and AI chip stocks are the biggest winners
The sharp increase in TSMC's capital expenditure is seen as a clear benefit to the entire AI semiconductor supply chain. A number of Wall Street investment banks were quick to give positive reviews.
Cantor Fitzgerald analyst C.J. Muse said that TSMC's capital expenditure report “clearly supports our bullish stance on semiconductors and semiconductor devices,” and is particularly optimistic about computing chips such as NVDA.US (NVDA.US), Broadcom (AVGO.US), and AMD (AMD.US), as well as equipment manufacturers such as Applied Materials (AMAT.US), ASML.US (ASML.US), Fanlin Group (LRCX.US), and MKS Instruments (MKSI.US) .
UBS analyst Crystal Hsu pointed out that TSMC “rarely raised its annual capital expenditure target in the second quarter, further strengthening the market's confidence in the prosperity of the AI supply chain, and also means that semiconductor equipment manufacturers are expected to continue to benefit.”
Wedbush analyst Matt Bryson's team also said that the increase in TSMC's capital spending “is in line with the strong performance expectations Asmack announced yesterday.” Just the day before (July 15), Asmat raised its annual sales forecast and plans to expand production capacity to meet the growing demand for AI.
J.P. Morgan predicts that TSMC's 2026 earnings per share forecast is expected to increase by 2% to 3%, driven by an increase in full-year revenue guidance. Morgan Stanley analyst Charlie Chan pointed out that gross margin was lower than the high expectations of some markets, and was mainly affected by the dilution effect brought about by the early accounting of 2-nanometer process depreciation and the commissioning of overseas fabs, but this will not change the company's long-term growth logic.
Stock prices fall: huge capital expenses raise earnings concerns
Despite TSMC surrendering record profits (net profit surged 77.4% year over year in the second quarter), the market responded with a sell-off. TSMC's stock price closed down by more than 2%, dragging down the entire semiconductor sector. Asmack had already triggered a sector sell-off the day before.
The core logic of the sell-off is that huge capital expenses raise investors' concerns about free cash flow pressure and the real costs of leading processes — these additional expenses will significantly reduce gross profit margins in the second half of the year. TSMC's third-quarter gross margin guidance was 66%, lower than Morgan Stanley's forecast of 67.5%. J.P. Morgan predicts that mass production of 2 nm in the second half of the year will put pressure on gross margins of about 300 to 400 basis points.
Wall Street generally believes that this reflects more of the phased pressure brought about by the commissioning of the new process, and does not change the basic logic of long-term upward demand for AI. J.P. Morgan characterized this as a “one-time profit margin reset,” and believes that long-term gross margin is still expected to remain stable above 60%. UBS also stated that management is more inclined to “prioritize customer relationships and optimize smooth profit margins through subsequent product portfolios”, and there has been no change in long-term fundamentals.
Prospects
TSMC's sharp increase in capital expenditure is the most direct signal that the wave of AI infrastructure investment is being transmitted to the semiconductor equipment sector. The unanimous optimism of institutions such as Cantor, UBS, and Wedbush is in stark contrast to market concerns about short-term profit pressure.
From a favorable perspective, the sharp increase in capital expenditure directly benefits semiconductor equipment suppliers. Cantor analyst CJ Muse and his team said, “This report clearly supports our bullish stance on semiconductors and semiconductor devices,” and specifically named equipment vendors such as Nvidia, Broadcom, AMD, and Applied Materials, Asmack, Fanlin Group, Kelei, and MKS Instruments. UBS analyst Crystal Hsu also pointed out that TSMC rarely raised its annual capital expenditure target in the second quarter, which means semiconductor equipment manufacturers are expected to continue to benefit.
The strong performance expectations that ASML (ASML) just announced on Wednesday echo TSMC's capital expenditure expansion. The Dutch lithography giant supplies extreme ultraviolet (EUV) and deep ultraviolet (DUV) lithographs to TSMC, and is TSMC's largest equipment supplier.
The other side of the market, however, is panic selling. The sharp increase in capital expenditure means that free cash flow will be significantly compressed, and gross margins will also be under pressure in the second half of the year. TSMC expects gross margin to fall slightly to the 65% to 67% range in the third quarter. The main reasons include the 3% to 4% gross margin dilution brought about at the beginning of large-scale mass production of the 2 nm process, and the initial dilution of 2% to 3% due to the expansion of overseas factories.
The market believes that the cost of expanding AI manufacturing capacity far exceeds expectations and may force the semiconductor industry to lower its valuation multiplier. Investors are currently paying close attention to subsequent financial reports from major cloud service providers to determine whether downstream software monetization capabilities can support huge investment in the entire hardware supply chain.
Investors will focus on the financial reports of downstream cloud giants to see if the software's monetization capacity can cover the huge investment in the supply chain. For equipment manufacturers, TSMC's capital expenditure commitment for the next three years is “significantly higher than the past three years”, which means a structural increase in order visibility. As the CFO of TSMC said, “We have very strong confidence in the AI trend” — under the AI “supercycle” narrative, short-term profit margin fluctuations are probably just a ripple in the long-term upward trend.