TSMC's Strong Q2 Missed as Market Fears CapEx Spike

What happened

Taiwan Semiconductor posted a stellar Q2 with EPS up 74% and revenue up 34%, but shares sold off after management guided 2026 CapEx to $60-64B and announced a $100B expansion plan. The market is waking up to the cost of TSMC's growth, as elevated spending threatens near-term free cash flow and margin dilution from 2nm and overseas fabs looms. Our DeepValue analysis has already flagged this tension, rating the stock a WAIT with an attractive entry below $360. The robust operating margins and balance sheet provide a cushion, but the current price of $402 already prices in durable AI demand. Until there is concrete evidence that earnings conversion outpaces the spending cycle, the risk/reward remains balanced at best.

Implication

TSMC's moat is unassailable, but the market is now pricing in the heavy capital costs of maintaining leadership. Over the next 6-12 months, margin compression from 2nm and Arizona ramps will likely pressure earnings growth, making it difficult for the stock to re-rate higher. Investors should monitor monthly revenue growth and gross margin guidance for signs that demand absorption is outpacing spending. A more attractive entry will emerge if the stock corrects to the $360 level or if management demonstrates two consecutive quarters of above-consensus results while gross margins hold above 66%. Longer-term, TSMC remains a core holding for AI exposure, but patience is required now.

Thesis delta

The core thesis of a strong moat but full valuation remains unchanged. However, the market's negative reaction to CapEx guidance reinforces the need for a larger margin of safety. The thesis now shifts slightly toward expecting more near-term volatility, as investors reassess the trade-off between growth investment and returns.