Taiwan Semi’s Higher Spending Is Spooking Markets. It Shouldn’t.
Here’s why the chip behemoth’s earnings should comfort semiconductor investors rather produce nervousness.
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Taiwan Semiconductor Manufacturing Co. (TSM) (TW:2330), the world’s largest maker of physical chips, Thursday boosted its sales and profits forecasts for Q3, as it notched record revenue and income for Q2. It also boosted its capital-expenditure plans by $100 billion as the capacity-constrained chip producer struggles to meet demand.
The results slightly outdid expectations — still setting fresh records for the company, but we have come to expect blowout earnings from the semiconductor industry and Artificial Intelligence (AI) plays of late.
And still this summer selldown in semiconductors continues. The memory makers are being savaged Thursday, with Micron Technology (MU) among those getting hammered, down 6%, as I write.
Korean Chipmakers Plunge – Again
Compare that to the 11.3% plummet in SK Hynix (HXSCL) (KR:000660) during South Korean trade, and the 8.8% decline in rival Samsung Electronics (KR:005930). The impact dragged the Korean benchmark index, the Kospi, down 6.4% on the day.
Those memory names are well into bear territory, with Hynix having corrected 36.8% from its June 25 closing high. Samsung is down 29.7% from its closing high on June 18. Yet they too have been notching record earnings. It’s what the market expects. Nay, demands.
This selloff in South Korea is magnified by the popularity of leveraged exchange-traded funds (ETFs) investing into the two chip giants. There were 16 single-stock leveraged ETFs that began trading on May 27 alone, providing leveraged 2x exposure to Samsung Electronics and Hynix, 14 of them on the long side and two on the short side. Those single-stock ETFs now account for as much as half of the daily trading in Hynix and Samsung.
The stock regulator in Seoul today unveiled new rules aimed at reducing the shocking degree of volatility on the Korean bourse. It is tripling the minimum deposit for retail investors to the equivalent of $20,305, and upping the minimum trade from 1 share to 20.
For now, though, any moves in the memory makers are magnified by forced selling on margin. We are also seeing a technical correction in Hynix as U.S. institutional investors and index providers sell down exposure in Seoul if they have bought into the $26.5 billion Hynix listing last Friday.
TSMC a Model of Consistency by Comparison
I like TSMC for its consistency. The shares are down 3.5% so far in U.S. trade today, it’s true, after a 1.2% advance in Taiwan. But the company is spared these dramatic fluctuations that we see in the Korean stocks.
It is in the less-sexy business of manufacturing physical microchips from blueprints sent to its by its customers. The sexier side of tech is on the design side, but TSMC moved early into a business that now has significant barriers to entry. It takes billions and years to build a new semiconductor foundry.
TSMC got plenty of government support in Taiwan to build out facilities with favorable rates on land, services and attractive labor costs. It also has production in mainland China, a new operation in Japan as of late 2024, and is building in Dresden, Germany, a joint venture with European partners.
The Numbers Look Good
TSMC delivered Q2 sales of $40.2 billion, up 36.0% year on year and at the top end of its guidance. That led to net income of $22.4 billion, up 77.8% year on year, and earnings per U.S. share of $4.31. Analysts had expected Q2 sales of $39.9 billion, with earnings per share of $3.80.
TSMC’s results and guidance “were broadly in line with expectations, reinforcing that AI remains the key growth driver, and implying the AI expansion cycle is not slowing down,” William Li, senior analyst at Counterpoint Research, says.
The forward-looking guidance is the most-instructive information out of today’s earnings. TSMC upped its sales forecast for Q3 to between $44.6 billion and $45.8 billion, which at the midpoint would be a 36.6% increase over last year. And another record.
Capex of Concern
The increased capex spending is what’s of greatest concern to market watchers. AI investors are worried that hyperscalers and their suppliers are overstretching themselves at a time that the profitability prospects for AI are not clear.
TSMC is not exactly in the same situation. We are in a period where demand for chips of all types is running well ahead of supply. Even if the AI operators overshoot the mark, there will still be demand for semiconductors, which TSMC currently can’t make quickly enough.
We are well into a summer where good news is still punished by the market. TSMC’s increased capex plans sent the likes of Micron lower, even though the types of Central Processing Units (CPUs) and Graphics Processing Units (GPUs) that TSMC is making must often be paired with High Bandwidth Memory (HBM) chips from Micron, Hynix or Samsung.
Micron Inks Auto Deals
Micron has just announced deals (excuse me, Strategic Customer Agreements in corpo-speak) to supply memory chips to seven customers in the auto industry, including Qualcomm (QCOM) and Hyundai Mobis (KR:012330), which makes smart-driving tech as well as car parts for the likes of Hyundai Motor (KR:005380), its Genesis luxury marque, and Kia (KR:000270).
TSMC’s numbers are also good news for Nvidia (NVDA), its largest customer, accounting for around 20% of TSMC’s sales. The earnings indicate that demand for High Performance Computing demand remains extremely strong, and continue to supercharge TSMC’s earnings. It is building a series of chip fabrication plants or “fabs,” given that land, production and labor costs will be higher than in Taiwan. On the plus side, TSMC will be building the newest, best fabs near its largest customers.
New Fabs in Phoenix
The Taiwanese company’s latest plans see its commit another $100 billion for a total investment of $265 billion in the years ahead. The new investment pledge includes four new chip fabs, on top of the existing six now in the works.
The company broke ground in 2021, and the first fab began production in Q4 2024. TSMC started making Nvidia’s new, top-flight Blackwell GPUs in October 2025, with other fabs due to come online this decade. The company says its yield rate in Arizona matches that at its latest fabs in Taiwan.
It’s Counterpart that compiles the numbers indicating just how dominant TSMC is when it comes to the chip foundry business. At last count, TSMC has cornered 73% of the market, way ahead of second-place Samsung Foundry with 7%.
That dominance has been rising to the current peak, too. The company first crossed the 50% mark in 2014 so it has only enhanced its competitive position during the current wave of next-gen chips.
Pure-Play Foundry
One reason TSMC is a popular producer for customers such as Nvidia and Apple (AAPL), its largest two clients, is that it is a pure-play foundry, meaning it does not compete with clients by designing chips.
TSMC is the main chip supplier to Nvidia, making semiconductors for AI applications, while it produces chips that go into Apple’s iPhones. Its client roster is a Who’s Who of the semiconductor sector, also including Broadcom (AVGO), MediaTek (TW:2454), Qualcomm, Advanced Micro Devices (AMD), Intel (INTC), Sony (SONY), Marvell Technology (MRVL), and Amazon.com (AMZN) via its web-services subsidiary.
TSMC faces a significant competitive challenge as Intel preps its own chip production, which is increasingly moving into the chip foundry business rather than paying TSMC to make chip wafers for it. The U.S. government last year said it is converting CHIPS and Science Act grants into a 9.9% equity stake in Intel, effectively paying $8.9 billion or $20.47 for the minority holding. Intel shares have skyrocketed since, trading at $98.73, as I write.
Intel’s fab business has been struggling, with below 1.0% market share globally. But its Foundry 2.0 plan intends to cast it as a contract manufacturer for major fabless chip designers.
We must watch TSMC’s market share to see signs of weakness. For now, though, I read its investment plans as wise anticipation of future demand.
DRAM Turns to DRAMA
I built up a position in TSMC when I started recommending it as a stock, giving me an average purchase price of $147. It has done amazingly well. I added to it Thursday, a position that I expect to hold long-term. I should note that I’m talking my own book since TSMC is my largest and longest-held position.
On the other hand, my recently built stake in the Roundhill Memory ETF (DRAM) is one I’m watching with concern. It has 74.6% of assets invested in Samsung, Micron and Hynix. Have we just seen the all-time peaks for these memory makers?
I’ve advised that investors can consider trading into positions anywhere around $60, while the recent high from is just above $80. DRAM is trading today below $53, given the drama in Korean trade. The chart does not look pretty since those highs.
I also added to that Thursday, bringing my average purchase price to around $60, but if the memory stocks are really into a long-term correction, dip buying may instead be a game of catching that falling knife.
At the time of publication, McMillan was long TSMC and DRAM.
