Wall Street is firmly optimistic about Taiwan Semiconductor's "investment": AI demand visibility extends to 2030, chip equipment stocks welcome good news

According to the Zhitong Finance APP, on July 16, TSMC (TSM.US), the global leader in wafer foundry, dropped a bombshell at its earnings call—raising its 2026 capital expenditure guidance significantly from $52 billion to $56 billion to $60 billion to $64 billion. At the same time, TSMC announced an additional $100 billion investment in Arizona, bringing its total investment commitment in the U.S. to $265 billion. The full-year revenue growth guidance in dollars was also raised from "over 30%" to "slightly above 40%." This capital expenditure increase, which far exceeded market expectations, was seen by Wall Street as a "shot in the arm" for the AI semiconductor supply chain, but concerns about short-term profitability and free cash flow triggered a collective drop in the semiconductor sector.

Capital Expenditure "Unexpectedly" Raised Significantly, AI Demand Visibility Extended to 2030

The increase in TSMC's capital expenditure far exceeded market expectations. Prior to the earnings call, several foreign institutions had estimated that TSMC might only raise its guidance to a range of $56 billion to $58 billion, but the final upper limit of $64 billion "greatly surpassed market consensus." TSMC Chairman C.C. Wei stated that AI demand remains "extremely strong." Chief Financial Officer Jensen Huang emphasized during the earnings call: "We are very confident in the AI mega trend, and capital expenditures over the next three years will be significantly higher than in the past three years."

TSMC also revealed that it will continue to deepen its investment in Taiwan in the coming years, constructing 13 advanced process wafer fabs and advanced packaging plants to meet the long-term demand for AI, high-performance computing, and advanced processes below 2 nanometers. Analysts believe that TSMC's simultaneous increase in capital expenditure and continued expansion represents a shift in AI demand from short-term urgent orders to multi-year capacity expansion, with demand visibility extending to 2030.

Analysts pointed out that TSMC remains confident in the AI mega trend, as its customers and their clients—cloud service providers (CSPs)—continue to send strong demand signals and demonstrate multi-year development prospects. Analysts added that although the consumer and price-sensitive end markets (smartphones and personal computers) still face challenges, TSMC is focusing more on high-value AI accelerators and AI CPUs.

TSMC CEO C.C. Wei explained that the demand for the capital expenditure increase mainly comes from two aspects: first, market demand continues to rise, and customers strongly request TSMC to expand capacity simultaneously; second, equipment inflation has raised procurement costs. Bank of America analysts also noted that "TSMC believes there are no bottlenecks in capacity expansion. Management also pointed out that rising equipment prices are a driving factor for increased capital expenditure."

Citi had previously raised its capital expenditure forecasts for TSMC for 2027 and 2028 to $75 billion and $80 billion, respectively. Goldman Sachs had raised TSMC's target price to NT$3,000 before the earnings call, with an ADR target price of $600 TSMC's recent adjustment not only signifies a further enhancement of its own growth momentum but also boosts the confidence of the entire AI semiconductor supply chain—semiconductor equipment, advanced packaging, storage, and other segments are expected to continue benefiting. The Wedbush analyst team also stated that TSMC's increase in capital expenditure aligns with ASML's strong performance expectations released yesterday, which is overall positive for the semiconductor capital equipment industry.

Wall Street is Optimistic: Equipment Manufacturers and AI Chip Stocks are the Biggest Winners

The significant increase in TSMC's capital expenditure is seen as a clear positive for the entire AI semiconductor supply chain. Several investment banks on Wall Street quickly provided positive evaluations.

Cantor Fitzgerald analyst C.J. Muse stated that TSMC's capital expenditure report "clearly supports our bullish stance on semiconductors and semiconductor equipment," and is particularly optimistic about computing chips such as NVIDIA (NVDA.US), Broadcom (AVGO.US), and AMD (AMD.US), as well as equipment manufacturers like Applied Materials (AMAT.US), ASML (ASML.US), Lam Research (LRCX.US), KLA (KLAC.US), and MKS Instruments (MKSI.US).

UBS analyst Crystal Hsu pointed out that TSMC "rarely raises its full-year capital expenditure target in the second quarter, further enhancing market confidence in the AI supply chain's prosperity, which also means semiconductor equipment manufacturers are likely to continue benefiting."

The Wedbush analyst team led by Matt Bryson also stated that TSMC's increase in capital expenditure "aligns with ASML's strong performance expectations released yesterday." Just the day before (July 15), ASML had raised its full-year sales expectations and planned to expand capacity to meet the growing demand for AI.

JP Morgan expects that, driven by the upward adjustment of the full-year revenue guidance, the market's forecast for TSMC's earnings per share in 2026 is likely to be raised by 2% to 3%. Morgan Stanley analyst Charlie Chan pointed out that the gross margin is below some market high expectations, mainly affected by the early depreciation of the 2-nanometer process and the dilution effect brought by the production of overseas wafer fabs, but this will not change the company's long-term growth logic.

Stock Price Decline: Huge Capital Expenditure Raises Profit Concerns

Despite TSMC reporting record profits (with a net profit in the second quarter soaring 77.4% year-on-year), the market responded with a sell-off. TSMC's stock price closed down more than 2%, dragging the entire semiconductor sector down. The day before, ASML had already triggered a sell-off in the sector.

The core logic of the sell-off lies in: the huge capital expenditure raises investors' concerns about free cash flow pressure and the real costs of leading processes—these new expenditures will significantly compress gross margins in the second half of the year. TSMC's guidance for the third quarter gross margin is 66%, lower than Morgan Stanley's forecast of 67.5%. JP Morgan expects that the mass production of the 2-nanometer process in the second half of the year will bring about 300 to 400 basis points of gross margin pressure.

Wall Street generally believes that this reflects more of the phase pressure brought by the production of new processes and does not change the fundamental logic of long-term upward AI demand. JP Morgan characterizes this as " The "one-time profit margin reset" suggests that the long-term gross margin is still expected to stabilize above 60%. UBS also stated that management is more inclined to "prioritize customer relationships and smooth out profit margins through subsequent product portfolio optimization," indicating that the long-term fundamentals have not changed.

Outlook

TSMC's significant upward adjustment of capital expenditure is the most direct signal of the AI infrastructure investment wave being transmitted to the semiconductor equipment sector. The unanimous bullish outlook from institutions like Cantor, UBS, and Wedbush sharply contrasts with market concerns about short-term profit pressures.

From a positive perspective, the substantial increase in capital expenditure directly benefits semiconductor equipment suppliers. Cantor analyst CJ Muse and his team stated: "This report clearly supports our bullish stance on semiconductors and semiconductor equipment," specifically naming Nvidia, Broadcom, AMD, as well as Applied Materials, ASML, Lam Research, KLA, and MKS Instruments among the equipment manufacturers. UBS analyst Crystal Hsu also pointed out that TSMC's rare increase in the annual capital expenditure target in the second quarter means that semiconductor equipment manufacturers are likely to continue benefiting.

ASML's strong earnings forecast released on Wednesday echoes TSMC's capital expenditure expansion. This Dutch lithography giant supplies extreme ultraviolet (EUV) and deep ultraviolet (DUV) lithography machines to TSMC and is TSMC's largest equipment supplier.

However, on the other side of the market is panic selling. The significant 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 its gross margin to slightly decline to the range of 65% to 67% in the third quarter, mainly due to a 3% to 4% gross margin dilution from the initial phase of mass production of the 2nm process and a 2% to 3% initial dilution from overseas factory expansion.

The market believes that the cost of expanding AI manufacturing capacity far exceeds expectations, which may force a downward adjustment of valuation multiples in the semiconductor industry. Investors are currently closely monitoring the upcoming earnings reports of major cloud service providers to assess whether the downstream software monetization capabilities can support the massive investments in the entire hardware supply chain.

Investors will focus on the earnings reports of downstream cloud giants to see if software monetization capabilities can cover the massive investments in the supply chain. For equipment manufacturers, TSMC's commitment to capital expenditure "significantly higher than the past three years" over the next three years means a structural improvement in order visibility. As TSMC's CFO stated, "We have a very strong confidence in the AI mega trend"—under the narrative of the AI "super cycle," short-term fluctuations in profit margins may just be a ripple in the long-term upward trend