Hey Folks, While Wall Street focuses on AI giants like Nvidia and AMD, the company manufacturing their chips deserves equal attention. Taiwan Semiconductor Manufacturing Company (TSMC) builds virtually every cutting-edge chip powering the AI revolution—from Nvidia's GPUs to Apple's processors to AMD's data center chips. As the world's largest chip foundry, TSMC operates as the ultimate picks-and-shovels play: when any tech company wins, TSMC wins. | | | The Foundation of Modern Computing Taiwan Semiconductor operates as a pure-play foundry—they don't design chips, they manufacture them for other companies. This business model has made them indispensable to virtually every major technology company. TSMC's dominance stems from their ability to manufacture chips at the most advanced process nodes in the world. These advanced nodes allow chips to be faster, more power-efficient, and more capable—critical advantages where AI workloads demand unprecedented computational power. The company's position creates several key advantages: - Universal Customer Base: Every major AI chip from Nvidia's H100 to Apple's M-series processors depends on TSMC's advanced manufacturing nodes—they're the invisible backbone of the AI arms race
- Technology Leadership: TSMC operates at 3-nanometer process nodes and below, capabilities that took decades and tens of billions to develop and that competitors struggle to replicate
- Scaling with Customers: As TSMC's clients expand—and they're scaling rapidly based on recent earnings—TSMC inevitably scales with them through long-term manufacturing contracts
When Apple designs faster M-series chips, TSMC manufactures them. The company sits at the center of a massive web of technology dependencies. | | | Record Growth Driving the Business Several powerful catalysts are converging that make TSMC particularly compelling, even at all-time highs. The AI boom is real and accelerating, and the numbers prove it. Recent earnings showed revenue up over 40% year-over-year with profits hitting all-time highs as AI and high-performance computing demand continues exploding. The financial momentum is undeniable: - Structural Growth: This isn't cyclical recovery—it's fundamental transformation driven by AI infrastructure needs, with guidance suggesting sustained momentum extending years into the future
- Margin Expansion Potential: Economies of scale on advanced nodes and depreciated older fabs should improve margins even as TSMC invests heavily in new capacity
- Pricing Power: Only TSMC and Samsung can manufacture at the most advanced nodes, giving TSMC significant leverage with customers who have limited alternatives for cutting-edge chips
The 2026 CapEx Surge: A Massive Tailwind for TSMC The most compelling near-term catalyst for TSMC comes from an unprecedented wave of capital expenditure announcements from the world's largest technology companies. Tech giants are committing to spend aggressively on AI infrastructure through 2026, and virtually every dollar spent on advanced chips flows through TSMC's fabs. The spending commitments are staggering, and they're accelerating into 2026: - Meta: Projecting $70B-$72B in CapEx for 2025, with CFO Susan Li explicitly warning that 2026 CapEx "will be notably larger" and total expenses will grow at a "significantly faster percentage rate"—directly tied to AI infrastructure and chip demand
- Alphabet: Raised 2025 forecast to $91B-$93B (up from $85B), with CFO Anat Ashkenazi stating the company expects "a significant increase in CapEx" in 2026 as cloud AI demand accelerates
- Microsoft: Spent $34.9B in a single quarter, with CFO Amy Hood announcing the fiscal 2026 growth rate will be "higher than FY25" driven by GPU and CPU procurement for Azure AI services
- Amazon: Deployed $89.9B year-to-date in 2025 with continued "significant investments, especially in AI" planned for AWS infrastructure and custom silicon like Trainium chips
- Apple: Expecting "increases in CapEx spending related to AI investments" as the company builds out Private Cloud Compute infrastructure to support on-device and cloud AI features
| | | Global Expansion Reduces Geopolitical Risk The concentration of advanced chip manufacturing in Taiwan has long worried investors. However, geopolitical risk may be decreasing through both diplomatic progress and TSMC's strategic expansion. Recent high-level U.S.-China talks could ease invasion fears, while TSMC's global expansion actively diversifies operational risk. TSMC is building new fabrication plants in Arizona, Japan, and Germany—a massive undertaking that addresses concerns while positioning the company for continued dominance: - Manufacturing Diversification: Production capacity outside Taiwan reduces concentration risk from potential conflict in the Taiwan Strait while improving supply chain resilience for global customers
- Billions in Subsidies: Friendly governments are providing substantial subsidies to secure domestic chip production, effectively defraying TSMC's expansion costs while strengthening strategic relationships
- Regulatory Navigation: Local manufacturing helps navigate increasingly complex export controls and national security requirements around advanced chip technology
This global footprint doesn't eliminate geopolitical risk, but it significantly reduces the all-or-nothing concentration that previously characterized TSMC's operations. Rather than betting on which AI company wins, TSMC benefits as all major players scale. Profits are hitting all-time highs, long-term contracts provide revenue visibility, and as TSMC achieves scale while maintaining technology leadership, margins should expand significantly. Anyways...
That's all for now! Until Next Time, -ZT Team |
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