AI Spending Remains a Concern for Other Chip Stocks, But Taiwan Semiconductor Has No Worries

Increasing worries about the sustainability of AI spending have pressured shares of semiconductor companies. However, Taiwan Semiconductor Manufacturing (TSM) is signaling a different message. This world's largest semiconductor foundry company announced July revenue of NT$467.58 billion ($14.5 billion), marking a 44.7% increase compared to the previous year.

The company reported such results while expecting 2026 revenue to be increased slightly over 40% in U.S. dollars. July's growth rate is higher, meaning that the demand for advanced semiconductor products is strong despite worries that Big Tech will continue to spend on AI infrastructure. This demand has influenced other semiconductor stocks, even while the entire semiconductor industry has been recently retreating.

About Taiwan Semiconductor Stock

Taiwan Semiconductor Manufacturing Company is the world's largest semiconductor foundry, based in Hsinchu, Taiwan. The company manufactures semiconductors rather than designs them. Customers of TSM include Nvidia (NVDA), Apple (AAPL), and many other technology companies. The company's market capitalization is approximately $2.17 trillion.

TSM stock closed at $418.47 on Aug. 10 and has been trading around $421 today, Aug. 11. Year-to-date (YTD), shares of TSM gained approximately 40% and are up nearly 89% from the 52-week low of $223.70. Despite all these gains, TSM still trades approximately 12% below the 52-week high of $479. Barchart data shows a gain of about 74% during the past 52 weeks.

The company's valuation is no longer cheap, but the earnings growth makes some sense. TSM stock trades at a forward price/earnings ratio of 25.54x and a price/sales ratio of 17.80x. Such multiples should be viewed in conjunction with a profit margin of 44.57% and a return on equity of over 39%. In other words, shares of TSM are quite expensive, but you pay for the most profitable business involved in the AI infrastructure cycle.

Taiwan Semiconductor Beats on Earnings

The July sales report of TSMC adds to already impressive quarter two results. TSMC reported Q2 revenue of NT$1.27 trillion, or $40.2 billion, marking a 36% increase year-over-year (YoY) in local currency and 33.7% in U.S. dollars. The company saw net income surging 77.4% YoY, while EPS of TSMC reached NT$27.25, or $4.31 per ADR.

Profitability of the company is also impressive. The gross margin is 67.7%, the operating margin is 60.3%, and the net margin is 55.6%. Advanced technologies (7 nanometers and below) took 77% of wafer revenue. The 3-nanometer process took 30% of wafer revenue, while the newest 2-nanometer technology took 3%.

This mix of technologies is important because high-performance computing products and AI accelerators become dependent on the most advanced semiconductor technologies of TSMC. High-performance computing made up 66% of Q2 revenue and is one of the clearest indicators of underlying semiconductor demand for AI infrastructure.

TSMC's management expects the momentum to continue in the next quarter. The revenue of the company is forecast to be between $44.6 billion and $45.8 billion, which implies $45.2 billion at the midpoint. Gross margin is expected to be between 65% and 67%, and operating margin between 56% and 58%.

But what is perhaps even more important, TSMC raised its expectations for full-year 2026 revenue to be increased slightly above 40% in U.S. dollars and raised capital expenditures to $60 billion and $64 billion. July sales increased by 44.7%, which means that the company is on track despite increasing difficulty of comparison due to last year's growth in the AI.

The rapid ramp-up of production of the 2-nanometer product provides an additional catalyst. The management expects Q3 results to benefit from strong demand for advanced semiconductor technologies, including the ramp-up of the newest semiconductor technology of the company. Thus, for those who wonder whether AI infrastructure spending slows down, order flow of TSMC says otherwise.

What Do Analysts Expect for TSM Stock?

Analysts assign a “Strong Buy” consensus rating and a mean price target of $503.15, marking the upside potential of approximately 20% from its closing price on Aug. 10, which was $418.47. The highest target of $650 suggests even more upside potential, while the lowest target stands at $330.

TSMC is no longer an overlooked company, and its valuation reflects high expectations for continued AI growth. But with July's sales increase of 45%, it becomes increasingly difficult to argue that semiconductor demand peak has peaked. With AI-related demand being strong, ramp-up of 2-nanometer production, and analysts maintaining the “Strong Buy” consensus, the underlying business supports the bullish thesis on TSM stock.