After Taiwan Semiconductor Manufacturing Company (ticker: TSM) announced its Q2 2026 earnings on the 16th of July, the market’s reaction to the stock has been ambivalent at best – with the stick slipping after registering a modest rise. It is intuitively understood that the premium fab – and arguably the only major fab for any chip designer in the world deep in the AI Hype – shouldn’t have quite that reaction given yet another record-breaking quarter.

Trend Analysis

While trends as of the first half (H1) of the year indicate revenue growth largely in line with the previous year’s.

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Source: Company Information; Leverage Shares analysis

If trends continue, revenue and net income for the full Fiscal Year (FY) 2026 would show a growth of 26% and 30% over the previous year, which is a little below the growth seen in FY 2025 and more similar to FY 2024.

The centrality of AI-relevant foundry work is now an undeniable thesis: the company’s smartphone segment is now smaller than its High-Performance Computing (HPC) segment was in terms of revenue contribution 7 years ago:

Source: Company Information; Leverage Shares analysis

Meanwhile, HPC has reliably accounted for well over half the company’s revenue for nearly three years now.

After a brief period of growing global diversification became evident in 2019 through 2022, TSMC’s revenue segments are more narrowly concentrated than ever before: North America (mostly the US) now accounts for three out of every four dollars it earns as revenue. China – once a promising market for revenue growth – now seems restricted below a 10% contribution. Concentration in platform, however, seems to have served the company well in passthrough efficiency:

Source: Company Information; Leverage Shares analysis

Cost of revenue per dollar in revenue is at the lowest level throughout the decade with nearly half of all revenue landing up in net income. In other words, the company’s profitability is now at all-time highs.

What Drove Market Reaction

A clear trend over the past few quarters in the valuation of AI-relevant stocks has been that the outlook for the future has mattered more than earnings. The company’s outlook for Q3 2026 expects revenue in the $44.6-45.8 billion range, representing around a 10% increase over the current reported quarter. Given the client mix and the dominant platform segment, this is neither unexpected nor information that isn’t already priced in.

The company also anticipates maintaining a gross profit margin between 65% and 67%, which stands at odds with its very ambitious plans regarding facility buildouts. The company has announced an additional $100 billion investment in its facilities in Arizona to set up several more semiconductor logic wafer fabs for 2-nanometer and below technologies, as well as advanced packaging fabs, to support strong multi-year demand from its US-based clients specifically. Simultaneously, it is building 13 leading-edge and advanced packaging fabs in Taiwan over the next several years. For all of FY 2026, TSMC has raised its CapEx guidance to the $60-64 billion range, up from its previous range of $52-56 billion.

Shifting more of the fabrication work from the cost-advantageous Taiwanese currency-denominated fabs to the American facilities inevitably brings concerns over higher overhead and production costs. These costs are expected to slightly pressure operating margins moving into the next quarter. Also, considering that it has stated a goal of firmly maintaining its gross profit margin at current levels while spending massive amounts implies that it will be pricing its output upwards.

While questions abound over whether TSMC’s massive capital investments can be monetized quickly, investors are also wondering if its clients can do so as well with the hundreds of billions allocated and/or spent already in the deployment of datacenters. This implies that the stock – already deemed mostly overvalued – is facing both first- and second-order effects of market scepticism.

The trajectory going forward is going to be rocky and lower levels of price support are bound to be tested.

Professional investors in Europe might consider the +3x Long Taiwan Semiconductor ETP (TSM3) and the -3x Taiwan Semiconductor ETP (TSMS) during bullish and bearish trends in the stock. For a broader yet leveraged exposure, the +4X Long Semiconductor ETP (SOXL) and the -4X Short Semiconductor ETP (SOXS) are at hand.

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