https://t.co/QKiEc3yy8z 【TSMC】Will the Expansion of Its Arizona Factory Be a Blessing or a Curse!? Acceleration Engine After Record Profit in Q2 by Hitoshi Nakamura, Investment Academy / BlueMo Securities #AISummary The Strength of AI Semiconductor Demand and Investment Risks Revealed by TSMC’s Earnings 🔳 Sharp Decline in Semiconductor Stocks This week, the SOX index dropped more than 8%, with major semiconductor stocks including Micron, Arm, Qualcomm, and Marvell falling by double digits. 🔳 Expansion of Profit-Taking Sales No major negative catalyst emerged; instead, analysts suggest that semiconductor stocks, which had risen on elevated expectations, saw concentrated profit-taking. 🔳 Capital Reallocation to Other Sectors Financials, consumer staples, and real estate sectors rose, indicating a shift of capital away from technology and semiconductors toward other sectors. 🔳 Impact on Japan and South Korea Global semiconductor stocks are highly correlated; the U.S. stock decline spilled over to Japan, Taiwan, and South Korea, with markets more dependent on semiconductors experiencing stronger impacts. 🔳 South Korea’s Leverage Problem South Korean retail investors actively use margin trading; margin calls and forced liquidations following price declines exacerbated market deterioration. 🔳 Why TSMC Is in Focus TSMC manufactures NVIDIA’s GPUs, Apple’s smartphone chips, and AMD’s CPUs, making it a critical company to gauge AI semiconductor demand. 🔳 Dominant Corporate Scale TSMC’s market capitalization stands at approximately $2.25 trillion (about ¥340 trillion in Japanese yen), ranking it as the world’s sixth-largest company. 🔳 Second Quarter Revenue Revenue for Q2 2026 reached $40.2 billion, up approximately 33–36% year-over-year and about 12% quarter-over-quarter. 🔳 Record Quarterly Revenue Revenue surpassed the company’s guidance of $39 billion, reaching the upper end of expectations at $40.2 billion—setting a new all-time quarterly high. 🔳 Surge in June Sales June monthly revenue reached NT$442.7 billion, a 67% year-over-year increase. 🔳 Significant Growth in Net Profit Net profit rose 77% year-over-year, significantly exceeding market expectations by approximately 12%. 🔳 Strength of Operating Profit Even excluding one-time gains from stock sales, operating profit increased 65.4% year-over-year, demonstrating robust profitability. 🔳 High Gross Profit Margin Gross profit margin reached 67.7%, exceeding the company’s guidance ceiling of 67.5%—an extraordinary level for a manufacturing company. 🔳 High Operating Profit Margin Operating profit margin hit 60%, surpassing guidance and underscoring TSMC’s overwhelming competitive advantage. ListItemIcon Exclusive Manufacturing Power Supporting High Profits Few competitors can mass-produce cutting-edge semiconductors reliably; TSMC possesses strong pricing power, maintaining order volumes even when raising prices. ListItemIcon Strong Customer Relationships TSMC has jointly developed manufacturing processes over long periods with Apple and NVIDIA, creating a structure where customers find it difficult to switch to other suppliers. ListItemIcon Three Factors Driving Profit Margin Improvement Improved manufacturing yields and operational efficiency, high utilization rates of advanced production lines, and pricing power fueled by excess demand for AI chips have all lifted margins. ListItemIcon Cost Burden of Overseas Factories Production at overseas facilities such as the Arizona plant incurs higher labor and operating costs, potentially pressuring future profit margins. ListItemIcon Core of AI-Related Revenue The High-Performance Computing segment accounted for 66% of total revenue, driven by growth in AI-targeted GPUs, server processors, and custom AI semiconductors. ListItemIcon Declining Smartphone Revenue Share Smartphone-related revenue fell to 22%, signaling a structural shift from smartphone-focused semiconductors toward AI infrastructure as the core business. ListItemIcon Share of Advanced Processes Advanced processes below 7nm accounted for 77% of total revenue: 33% from 5nm, 30% from 3nm, and 3% from 2nm. ListItemIcon Ramp-Up of 2nm Production Even though 2nm production just began, it already contributes 3% to revenue, indicating smooth adoption by customers including Apple and AMD. ListItemIcon High Unit Price of 2nm Each 2nm wafer is priced above $30,000 (approximately ¥4.5 million in Japanese yen); scaling up production is expected to further boost revenue and profit margins. ListItemIcon Demand for Advanced Packaging CoWoS—critical for densely connecting GPUs and HBM—is indispensable for AI semiconductors; production capacity for 2026 is nearly fully sold out. ListItemIcon Extended Lead Times CoWoS lead times have stretched from 52 to 78 weeks, meaning production slots are booked out up to one to one-and-a-half years ahead. ListItemIcon NVIDIA’s Production Capacity Secured NVIDIA has secured approximately 60% of CoWoS production capacity for 2026, creating a constraint for other companies seeking to ramp up AI semiconductor output. ListItemIcon Cloud Giants’ Capital Expenditure Amazon, Google, Meta, and Microsoft’s combined capital expenditure for 2026 is estimated at approximately $700 billion (over ¥100 trillion in Japanese yen). ListItemIcon Relationship Between Capital Expenditure and TSMCMajor cloud providers are channeling funds into GPUs, custom AI chips, and data centers, with TSMC manufacturing much of this semiconductor demand. 🔳 Third Quarter Revenue Guidance Third-quarter revenue is projected at $44.6 billion to $45.8 billion, representing an approximate 10% to 14% increase from the second quarter. 🔳 Drivers of Accelerated Growth TSMC cited surging demand for AI semiconductors, the start of production for the next-generation iPhone, and higher-margin products such as 3nm and 2nm nodes as key factors driving revenue growth. 🔳 Upside Potential for Full-Year Guidance The company forecasts over 30% revenue growth for full-year 2026; however, given strong first-half results and third-quarter guidance, this outlook appears conservative and subject to upward revision. 🔳 Expected Decline in Next Quarter’s Profit Margins Next quarter’s gross margin is forecast at 60% to 67%, and operating margin at 56% to 58%, indicating a potential decline from current levels. 🔳 Factors Pressuring Profit Margins TSMC attributed margin pressure to costs associated with improving yields during early-stage 2nm mass production, higher operating costs at its Arizona facility, and foreign exchange fluctuations involving the New Taiwan Dollar. 🔳 2026 Capital Expenditure TSMC’s 2026 capital expenditure is expected to range between $52 billion and $56 billion, with potential to reach as high as $58 billion. 🔳 Allocation of Capital Expenditure Funds will be directed toward expanding production capacity for 2nm and 3nm nodes, increasing CoWoS output, and developing the second Arizona facility. 🔳 Future Expansion of Capital Spending Analysts noted that capital expenditures could expand to $75 billion–$80 billion between 2027 and 2028. 🔳 Tailwinds for Japanese Companies TSMC’s expanded investment is expected to benefit Japanese semiconductor equipment manufacturers, including Tokyo Electron, Disco, Advantest, and Screen Holdings. 🔳 Risk of Overvaluation TSMC’s U.S. depositary receipts have risen approximately 88% over the past year, suggesting that strong financial performance may already be fully priced into the stock. 🔳 Reason for Price Declines Despite Strong Earnings Even with solid business fundamentals, if results fall short of elevated market expectations, TSMC’s stock may decline along with broader semiconductor sector corrections. 🔳 Customer Concentration Risk High reliance on key customers such as NVIDIA and Apple means any slowdown in demand from these clients could significantly impact TSMC’s performance. 🔳 Progress in Customer Diversification Growing orders from Google, Amazon, and Microsoft for their own custom AI chips suggest a gradual reduction in dependence on NVIDIA. 🔳 Risk of a Taiwan Crisis With advanced semiconductor production concentrated in Taiwan, any disruption in the Taiwan Strait could severely affect AI investments and the global economy. 🔳 Impact of U.S.-China Rivalry U.S. export controls on China and tariff policies may accelerate overseas production, potentially lowering geopolitical risks but at the cost of reduced profit margins. 🔳 Confirmation of Strong AI Demand Based on TSMC’s revenue, profits, order backlog, and capital expenditure plans, AI semiconductor demand remains exceptionally strong and continues to outstrip supply capacity. 🔳 Leading Indicator for the Global Economy TSMC’s performance serves not only as a key indicator for individual stock investment but also as a critical barometer for the health of AI investment, broader equity markets, and global economic growth.