Taiwan Semiconductor Manufacturing Co. (TSMC) and ASML, titans of the semiconductor industry, have both reported robust quarterly earnings, fueled by an insatiable demand for artificial intelligence (AI) chips. However, Wall Street’s reaction has been notably muted, underscoring the immense market expectations that now weigh on these industry giants.
TSMC, the world’s largest contract chip manufacturer, posted a significant 58% surge in first-quarter profits, surpassing analyst estimates and marking its fourth consecutive quarter of record-breaking earnings. “AI-related demand continues to be extremely robust,” stated TSMC President and CEO C.C. Wei during an earnings call. Despite this impressive financial performance, TSMC shares experienced a dip of approximately 3% following the announcement.
A substantial 61% of TSMC’s Q1 revenue originated from its high-performance computing segment, a segment heavily dominated by AI chips produced for its key customer, Nvidia. This figure represents an increase from 55% in the preceding quarter. Jordan Klein of Mizuho Securities commented, “The results have been good, but they were expected to be. And whenever people see some of these semis trade a bit down on good numbers, that creates a little bit of a fast money rotation.”
The company’s gross margins also saw an uptick, reaching 66%. This improvement is likely attributable to TSMC’s commanding position in leading-edge chip manufacturing, which empowers it to command premium pricing from major clients like Apple and Nvidia, both heavily reliant on chips produced at 7nm process nodes and below. These advanced chips constituted approximately 74% of TSMC’s total revenue. Klein further elaborated, “I also think that they’re turning away some of this more mature, lagging-edge business and devoting it to more leading-edge.”
A sole area of concern for TSMC was a 11% decline in smartphone revenue compared to the previous quarter, a trend attributed to ongoing memory shortages within the mobile industry. On the geopolitical front, TSMC executives indicated that they do not foresee any immediate impact from potential energy and supply chain disruptions stemming from recent regional conflicts, citing a strategic inventory of specialty gases like helium and hydrogen.
Meanwhile, ASML, a crucial supplier of chip manufacturing equipment, saw its shares tumble by as much as 6.5% on Wednesday, before recovering slightly to close down approximately 2.5%. This volatility was partly driven by concerns over reduced sales to China and the high expectations set by investors. The Dutch firm reported strong first-quarter results and revised its forward guidance upwards, yet this adjustment merely met existing investor projections. The inability of either TSMC or ASML to gain significant traction from their positive earnings reports could serve as a leading indicator for the broader semiconductor sector as the earnings season progresses. This situation also highlights a recurring theme in the market: the substantial impact of astronomical investor expectations on chipmaker stocks, a phenomenon previously observed with Nvidia’s stock experiencing a 5% sell-off following its own strong fourth-quarter earnings.
### The Evolving Landscape of Chipmaking
ASML’s highly specialized extreme ultraviolet (EUV) lithography machines, priced at over $400 million each, are indispensable for etching the intricate designs required for the most advanced chips. These machines are the sole technology capable of producing the cutting-edge chips manufactured by TSMC for industry titans such as Apple, Nvidia, AMD, Google, and Amazon. Despite this critical role, the number of EUV machines ASML plans to deliver to clients like TSMC did not fully satisfy some analysts.
ASML CEO Christophe Fouquet indicated that the company could potentially deliver 80 of its low numerical aperture (NA) EUV machines in 2027, contingent on sustained customer demand. This projection, however, fell slightly short of some analysts’ hopes for up to 90 units. “If they could get production up, they’d sell every one of those tools,” Klein noted. “It’s just really, really hard to do, and these guys are smart and they’re not going to overpromise and under-deliver.”
Investor scrutiny was also intensely focused on TSMC’s capital expenditure (CapEx) projections, which include significant investments in ASML machinery. TSMC announced its intention to invest between $52 billion and $56 billion in 2026, a notable increase from its $40.5 billion CapEx in 2025. In the current market climate characterized by elevated expectations, investors were anticipating TSMC to significantly exceed its previously stated annual growth target of 30%. TSMC, known for its conservative financial outlook, reaffirmed its commitment to exceeding this target and projected a 10% revenue increase for the second quarter.
Klein emphasized TSMC’s conservative management style, noting that it has only been one quarter since the new targets were set. He identified the company’s primary constraint on revenue growth as its current “fully sold out” capacity, coupled with limitations on price increases within a 12-month period. “They need to get more capacity, both for front-end production and packaging, and it just takes time,” Klein explained. “This sets them up next year to get more capacity and potentially sustain the growth.”
TSMC is actively expanding its advanced chip fabrication facilities in Arizona. However, the next critical bottleneck in AI chip production is emerging in advanced packaging – the process of protecting and integrating chips into larger systems. Nvidia has already secured a substantial portion of TSMC’s capacity for its most advanced packaging technology, Chip on Wafer on Substrate (CoWoS). TSMC is accelerating the ramp-up of two new advanced packaging facilities in Taiwan and is preparing to establish two more in Arizona this year to meet surging demand.
Intel, another prominent player in advanced packaging, is also striving to compete with TSMC in chip manufacturing. While Intel has yet to secure major external customers for its advanced packaging services, this area could prove to be a significant differentiator. Intel’s current packaging clients include Amazon and Cisco, with recent commitments from SpaceX and Tesla signaling growing interest in its capabilities. Klein, however, does not anticipate Intel surpassing TSMC in the advanced packaging domain, viewing it more as an alternative capacity provider for customers.
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