Summary of Key Points
TSMC's financial report for the second quarter of 2026 was "meeting expectations but not exceeding them": The demand for AI chips drove revenue (US$40.2 billion, a 12% increase quarter-over-quarter) and gross margin (67.7%, slightly above targets). The 3nm manufacturing process is now at full capacity, and 2nm production has begun to contribute to revenue (accounting for 3%). Capital expenditure was significantly increased to US$60-64 billion. The market had hoped for an "impressive performance" to boost confidence in the AI industry, but the report only met expectations, leading to a slight decline in the stock price. However, TSMC's dominant position in the AI supply chain (with its advanced manufacturing processes and CoWoS packaging technology) remains solid, resulting in a much smaller drop in its stock price compared to other AI companies.
Detailed Analysis
1. Revenue: AI Chips Drive Growth in Both Volume and Price, but Only Meeting Expectations
Revenue for this quarter was US$40.2 billion, just reaching the upper end of the target range (US$390-402 billion) and close to the market's expectation of US$40 billion. The growth was entirely due to AI chips: Key customers such as Nvidia and AMD have shifted their production to 3nm platforms, which increased both the volume of wafers shipped (a 3.9% increase quarter-over-quarter) and the revenue per wafer (a 7.8% increase). Why didn't it exceed expectations? TSMC releases its financial data monthly, so the market had already formed its expectations in advance; the actual results were within what was anticipated, leaving no surprises.
2. Gross Margin: Upward but Not Dramatic
The gross margin was 67.7%, slightly higher than the target range (67.5%), but it fell short of some investors' expectations of over 69%. This wasn't due to TSMC's inability to achieve higher margins; rather, it was a strategic choice. With strong demand for AI chips, TSMC could have raised prices further, but it opted for a more moderate approach to maintain long-term relationships with major customers like Nvidia and Apple. The increase in gross margin was mainly driven by the upgrade in product mix, as advanced processes (below 7nm) accounted for 77% of sales, and these higher-priced chips offset the impact of increased equipment depreciation (fixed costs).
3. Advanced Manufacturing Processes
- 3nm: Full Capacity and Profitability
- 3nm production is at 100% capacity, with AI chips accounting for 30% of revenue. Previously, 3nm was primarily used for mobile phone chips, but now AI chips have taken over, reducing the seasonal fluctuations in the mobile phone business.
- 2nm: Starting to Generate Revenue
- 2nm contributed 3% of revenue this quarter (e.g., with AMD's MI450 chip), and the yield was satisfactory. TSMC plans to gradually transition some mobile phone chips to 2nm production, freeing up capacity for higher-profiting AI applications.
The increasing proportion of advanced processes indicates that TSMC is becoming more efficient in generating profits through its technological advantages.
4. Capital Expenditure: Investing Heavily to Expand Capacity in the AI Segment
Annual capital expenditure was raised from US$52-56 billion to US$60-64 billion, with US$332-372 billion to be spent in the second half of the year (a 56%-75% increase). The funds will be used for two main areas:
- 2nm Expansion: High yields and strong demand require additional capacity.
- CoWoS Packaging: AI chips require advanced packaging technology like CoWoS, of which TSMC holds over 90% of the global production capacity. Current monthly output is 90,000 wafers, with plans to increase this to 120,000 by the end of the year to meet the needs of Nvidia and Broadcom.
TSMC is investing heavily because it believes demand for AI chips will continue to grow and its technology gives it a competitive advantage.
5. Market Reaction: Disappointed but Still Trusting
The stock price declined after the report, but the decline was milder than that of other AI companies. There are two main reasons:
- Disappointing Results: The market expected more significant growth, but the report only met moderate expectations.
- Dominant Position: Samsung and Intel's advanced manufacturing processes lag significantly behind TSMC (lower yields and lower transistor density), so customers have no choice but to rely on TSMC. CoWoS packaging is a critical technology; without it, AI chips cannot be produced. TSMC plays a pivotal role in the AI supply chain.
Conclusion
Although TSMC's report did not provide significant surprises, its core strengths (advanced manufacturing processes and CoWoS packaging) remain unmatched. The short-term decline in stock price is due to market sentiment, but in the long term, TSMC remains the most stable and valuable asset in the AI industry. It's like scoring 90 out of 100 on an exam; while it didn't meet everyone's expectations, it still ranks first in the class.