Key Points

TSMC shares declined this week following robust earnings and plans for an extra $100 billion investment in U.S. chip production sites.
TSMC's edge in semiconductor fabrication technology has allowed it to increase prices and improve profitability.
Executives anticipate faster revenue growth in the latter part of the year with added capacity.
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On Thursday, Taiwan Semiconductor Manufacturing (NYSE: TSM), commonly referred to as TSMC, announced second-quarter results that surpassed forecasts. Executives also highlighted intentions to boost capital outlays due to rising need for advanced chips. This includes a fresh $100 billion pledge for new Arizona plants beyond prior commitments totaling $165 billion in the United States.

The market appears cautious about the higher spending, pushing shares down after the announcement. Yet the recent pullback this month may present an entry point for long-term holders.

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Image source: Taiwan Semiconductor Manufacturing.

TSMC's clear technological advantage

Leadership offered limited details on the additional $100 billion for U.S. expansion but emphasized plans to increase overall output starting in the second half of 2026. Capital spending guidance was raised to a range of $60 billion to $64 billion for the year, compared with the earlier projection of $52 billion to $56 billion.

Some investors worry about the sustainability of demand for TSMC's advanced AI-related chips over time. The high-performance computing division, largely driven by AI processors, made up two-thirds of revenue in the latest quarter and grew fastest among segments.

Nevertheless, several elements support confidence in solid returns on capital. Management projects revenue to rise more than 40 percent for the full year, supported by very strong profitability. Gross margin reached 67.7 percent and operating margin hit 60.3 percent, reflecting year-over-year gains of 9.1 and 10.7 percentage points.

TSMC's superiority in manufacturing leading-edge chips with high yields at volume provides meaningful pricing leverage. The company applied this leverage with increases at the start of the year and again recently. Ongoing efficiency gains on the 3-nanometer node should further lift margins, though the early ramp of the 2-nanometer process will temper some of the benefit.

Over the longer term, extended lead times and technological superiority allow TSMC to add capacity with greater assurance of customer demand. While exposed to industry cycles, its scale and process leadership reduce downside risks. Designers are more inclined to cut ties with smaller or less advanced suppliers than to reduce orders with TSMC.

Combining robust top-line expansion of 40 percent this year and at least 20 percent thereafter with margin improvement from pricing strength positions TSMC for solid earnings growth despite higher depreciation. At roughly 25 times earnings, the shares represent an attractive entry point at present.

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Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.