Taiwan Semiconductor's after-tax profit for the first quarter of 2026 reached NT$572.48 billion, a year-on-year increase of 58.3%. Both the gross margin and operating margin hit record highs – delivering impressive figures as expected. Following the investor conference, HSBC Securities raised its target price for Taiwan Semiconductor to NT$2,800 within two days, which is expected to trigger another wave of upward revisions in target prices. However, what truly stands out from this investor conference is not just the financial report itself, but how the leading semiconductor foundry is positioning itself to maintain its leadership and remain unbeatable in the AI era.
3nm: The 'New Gold' of the AI Era
Rare expansion again, capital expenditure pushed to the upper limit of forecasts.
Taiwan Semiconductor has an unwritten rule, as Chairman C. C. Wei himself put it: 'Once a process node reaches its target capacity, we will not add extra capacity.' The 2nm process had already officially entered mass production in the fourth quarter of last year.
However, during this earnings call, he made the rare announcement of breaking tradition – adding a new wafer fab in Tainan, introducing 3nm at the second Arizona plant, upgrading the second Kumamoto plant from the planned 6nm to 3nm, and simultaneously converting existing 5nm equipment to support 3nm capacity.
The reason is straightforward: AI demand is too strong, and capacity is insufficient to meet it. This quarter, 3nm accounts for 25% of wafer sales, while the HPC (High-Performance Computing) platform contributes 61% of total revenue.
C. C. Wei also pointed out a deeper structural shift – AI transitioning from 'Query Mode' to 'Agentic AI,' where each command no longer merely retrieves information but initiates actions and execution, consuming computational power on an entirely different scale.
Market analysts interpret this wave of capacity expansion as Taiwan Semiconductor’s strategic declaration to leverage its current period of maximum technological leadership, leaving no room for competitors to catch up.
This is directly reflected in capital expenditures. Taiwan Semiconductor has confirmed that its 2026 capital expenditure will reach the upper limit of the forecast range at $56 billion and announced that the scale of investments over the next three years will be 'significantly higher' than the cumulative $101 billion of the past three years. Morgan Stanley even raised Taiwan Semiconductor's total capital expenditure forecast for 2026 to 2028 to $200 billion in its latest report.
Will the high cost of overseas expansion erode profits? It deepens client ties instead.
Taiwan Semiconductor's gross margin in the first quarter of this year reached 66.2%, once again breaking its historical record and surpassing the upper limit of guidance by a full 120 basis points. While the market marvels at this figure, many are curious whether it can be sustained – will it rise further or has it already hit the ceiling?
Regarding gross margin, Chief Financial Officer Huang Renzhao pointed out during the earnings call that the ramp-up of Taiwan Semiconductor's 2-nanometer production will be impacted by initial yield rates, which is expected to dilute the company's annual gross margin by approximately 2% to 3%. As for the cost dilution caused by overseas factory construction, the initial impact will be around 2% to 3%, with expectations to expand to 3% to 4% later. This is because as overseas plants grow in scale and their share of overall capacity increases, the disadvantages of localized labor, energy, and supply chain costs are amplified.
However, General Manager Wu Jinrong of Weidu Technology believes there is no need for excessive concern, as Taiwan Semiconductor has accumulated significant experience in constructing facilities in Arizona, where advanced packaging plants are also underway. He emphasized Taiwan Semiconductor's one-stop service capability, ranging from wafer production to CoWoS packaging. In Taiwan, products can even be drop-shipped directly to assembly plants in real time. "This level of integration cannot be replicated by anyone in the short term." Under the new realities of global geopolitics, the gross margin loss from overseas expansion translates into deeper binding with customers.
Moreover, the large-scale expansion of the 3-nanometer process itself serves as a tool to support gross margin: as the node matures, yields stabilize, and depreciation pressures decrease. Huang Renzhao confirmed that the 3-nanometer gross margin is expected to surpass the company’s average level by the second half of 2026. The expansion aims not only to capture market share but also to solidify the gross margin structure.
Why does NVIDIA, its largest customer, support the price hike? Analysts: To pressure competitors out of the market.
Regarding the market's most pressing concern about price increases, C. C. Wei reiterated the company’s stance of treating clients as partners and clearly stated that when capacity is tight, Taiwan Semiconductor does not discriminate between clients based on size or importance. The core rationale for the price adjustment lies in reflecting value rather than pursuing short-term profits.
At this year’s GTC conference, NVIDIA CEO Jensen Huang stated, "Taiwan Semiconductor’s wafers are the most expensive in the world, but also the most valuable. I am willing to pay for that." Previously, he also expressed dissatisfaction regarding Taiwan Semiconductor’s stock price and foundry pricing.
Zheng Gaoji, Associate Director of Unity Investment Advisory Research Department, analyzed that NVIDIA, with its extremely high gross margins, can absorb Taiwan Semiconductor’s price hikes as manageable costs, whereas for competitors with lower gross margins, it poses fatal pressure. Allowing Taiwan Semiconductor to raise prices essentially pressures competitors to exit the market first. As Taiwan Semiconductor’s largest client, NVIDIA welcomes continued price increases, and Taiwan Semiconductor itself intends to raise prices. With both parties aligned, Zheng believes this trend will persist.
Middle East conflicts, memory price surges, and sluggish consumer electronics have not caused disruptions.
Amid ongoing tensions in the Middle East, Taiwan Semiconductor addressed concerns during its earnings call: safe inventory levels of specialty chemicals such as helium and hydrogen have been secured, and the government has ensured uninterrupted liquefied natural gas (LNG) supplies through at least May to maintain stable power. C. C. Wei assessed that recent developments are not expected to cause operational disruptions. While acknowledging rising chemical and energy costs, he emphasized, "It is too early to quantify the impact."
Memory price increases have caused weakness in smartphone and PC markets. C. C. Wei admitted to seeing "some softness" in these markets. According to IDC's latest data, global smartphone shipments contracted for the first time in Q1 2023 amid dual pressures from rising memory costs and heightened expenses due to the Middle East conflict. Only Apple and Samsung maintained shipment growth. However, Taiwan Semiconductor’s high-end smartphone clients performed relatively well, and with demand for AI and HPC continuing to surge, orders for core logic chips used to drive high-bandwidth memory (HBM), produced by Taiwan Semiconductor, remained robust. In short, the chill in consumer electronics has not penetrated Taiwan Semiconductor’s cleanrooms.
Facing competition and noise from Intel, Samsung, and even Elon Musk's Terafab initiative, C. C. Wei repeatedly emphasized the same point during the earnings call: "(In semiconductor foundry,) there are no shortcuts." Building a fab takes two to three years, while introducing a new process and stabilizing its yield to reach mass production scale requires an additional one to two years. Achieving Taiwan Semiconductor's technology leadership, manufacturing excellence, and customer trust demands time to overcome each hurdle.
Editor/joryn