TAIPEI, July 20, 2026, 16:14 (GMT+8)
- Taiwan’s standard cash market is shut. U.S. core markets have yet to start trading.
- TSMC gained 1.3% on Monday, recovering some ground after a 7.3% drop on Friday.
- Free cash flow in the second quarter declined 17.5% from the previous quarter, while capital expenditure increased by 41.4%.
Taiwan Semiconductor Manufacturing Co. (TPE:2330; NYSE:TSM) reported its highest-ever quarterly profit. However, free cash flow declined 17.5% versus the first quarter due to a jump in capital expenditures. That gap is a stronger indicator for investors regarding its Arizona expansion.
Demand concerns are not immediate. TSMC has increased its 2026 revenue growth forecast to just over 40% and raised yearly capital expenditures to a range of $60 billion-$64 billion. The challenge lies in cash conversion.
Investors expressed worry last week. On Friday, Taipei’s market dropped 7.3%, and the SOX index slipped roughly 10%. The stock bounced back by 1.3% on Monday. Toni Meadows of BRI Wealth Management pointed to “rising scrutiny of AI capex sustainability.” AP News
The quarter-on-quarter data highlights the allocation of cash.
| NT$ billion, except ratio | Q1 2026 | Q2 2026 | Change |
|---|---|---|---|
| Net profit | 572.48 | 706.56 | +23.4% |
| Operating cash flow | 698.97 | 783.36 | +12.1% |
| Investment in capital | 350.76 | 496.00 | +41.4% |
| Free cash generated | 348.21 | 287.36 | -17.5% |
| Free cash flow over net income | 60.8% | 40.7% | -20.2 points |
Free cash flow is calculated as operating cash flow minus capital expenditures. Changes and conversion ratios are determined by reporters using company information.
Capital expenditure grew at a rate 3.4 times higher than operating cash flow. Free-cash-flow conversion dropped to 40.7% of net income, a decline from 60.8%. Investments are increasing ahead of new capacity coming online.
Annual capex at the $62 billion guidance midpoint increased by 14.8% compared to the previous midpoint. The latest Arizona commitment amounts to 1.6 times the one-year capex budget. The entire initiative totals 4.3 times that figure. TSMC did not disclose a definitive timeline, so these ratios only illustrate relative size.
Demand figures continue to be robust. High-performance computing accounted for 66% of revenue in the second quarter, increasing 20% from the previous quarter. Two-nanometer chips made up 3% of wafer revenue. TSMC projected third-quarter revenue in the range of $44.6 billion to $45.8 billion.
Chief Financial Officer Wendell Huang noted that customers expressed “strong demand — multi-year structural demand.” The inaugural Arizona fab achieves yields comparable to TSMC’s Taiwan flagship, easing a key production concern. Reuters
Equipment is set to arrive at the second fab shortly. Construction on a third fab is progressing, with initial work already underway for a fourth fab and the inaugural packaging plant. The Arizona site is intended to feature 12 fabs along with packaging operations and R&D facilities.
TSMC is constructing 13 advanced and packaging fabrication plants domestically. Executives stated that the latest leading-edge technologies will achieve stability in Taiwan before elsewhere.
The expenses impact more than just finances. Third-quarter gross margin is projected at 66%, representing a 1.7-point drop from the previous period. Leadership anticipates N2 will reduce second-half margin by 3–4 points. Foreign fabs might initially lower margin by 2–3 points, with the gap potentially widening to 3–4 points.
Counterpoint Research analyst William Li described the expansion as “essential to support its long-term growth.” The cash-flow figures reveal how quickly that pressure begins. AP News
After Taiwan’s regular session ended, focus moves to U.S. corporate results. Alphabet NASDAQ:GOOGL and Intel NASDAQ:INTC are due to release earnings this week. Alphabet’s investment strategy will gauge demand among customers. Intel’s update on its foundry business will be a test of industry competition.
Execution challenges persist. Arizona continues to encounter shortages in construction workers and infrastructure. Declining cloud spending might reduce utilization rates. International expansions are set to maintain pressure on margins.
Investors are now looking for clear evidence: operating cash flow needs to outpace growth in capital spending.
Related articles: NYSE:TSM
