New York, July 16, 2026 – Taiwan Semiconductor Manufacturing Co (NYSE: TSM; TPE: 2330) saw its American depositary receipts decline 2.9% in early trading on Thursday, settling at $407.46 by 09:44 EDT. The drop came despite the company posting a record quarterly profit, as investors focused on a sharp deterioration in cash flow metrics and rising capital expenditure commitments.
According to company filings, net income for the second quarter of 2026 surged 23.4% sequentially to NT$706.56 billion, exceeding analyst consensus by 11.7%. Revenue reached $40.2 billion, and TSMC now expects full-year dollar sales to grow by more than 40%. However, free cash flow fell 17.5% to NT$287.36 billion, dragging the free-cash-flow conversion ratio down to 40.7% from 60.8% in the prior quarter.
The divergence between profit growth and cash generation stems from a 41.4% jump in capital spending to NT$496 billion. TSMC raised its full-year 2026 capex guidance to a range of $60 billion to $64 billion, with a midpoint of $62 billion, representing a 14.8% increase from the previous $52 billion–$56 billion range. CFO Wendell Huang noted on the earnings call that higher capital spending is historically correlated with stronger growth opportunities in subsequent years.
Beyond the financials, TSMC announced a $100 billion increase in its planned U.S. investment, bringing total projected outlays to $265 billion. The expansion aims to meet surging demand for advanced chips from key customers including Apple and Nvidia.
The quality of the record profit was also mixed. Non-operating income jumped more than threefold, including NT$63.2 billion from a stake sale and mark-to-market gains. Such items are less sustainable than core operating earnings, raising questions about underlying profitability.
Looking ahead, TSMC guided third-quarter revenue between $44.6 billion and $45.8 billion, implying sequential growth of around 12.4% at the midpoint. However, the midpoint for operating margin is expected to decline 3.3 percentage points to 57%, reflecting initial costs from ramping 2-nanometer production. The company noted that 2nm output has accelerated quickly, now representing 3% of wafer revenue, while advanced nodes overall contributed 77% of wafer revenue. Inventory days rose to 87 from 80, driven by the N2 ramp.
The broader semiconductor sector also faced headwinds. The iShares Semiconductor ETF (NASDAQ: SOXX) fell 3.5%, slightly more than TSMC's decline, as chip stocks were broadly sold off. Taiwan's benchmark stock index, the TAIEX, closed up 1.23% at NT$24,700 before TSMC's post-market earnings call.
TSMC's balance sheet remains strong, with net cash reserves of NT$2.49 trillion at quarter-end, providing a buffer against funding risks. However, execution challenges persist. Gross margin has been pressured by higher costs from overseas fabs, and the N2 ramp has inflated inventory. If demand weakens, recovering those costs could prove difficult.
For investors, the key question is whether free cash flow will improve in the third quarter to align with revenue and profit growth. The market's reaction suggests caution until that picture becomes clearer.
