Taiwan Semiconductor is celebrating with song, while ASML Holding is feeling down, why is that?

Wafer foundry.$Taiwan Semiconductor (TSM.US)$ On the eve of announcing its second-quarter 2025 performance, the stock price hit a record high of $237.56, with a Market Cap of $1.23 trillion. After announcing the results, its Pre-Market Trading surged by 4.21% to $247.67, seemingly providing a good indication for the opening of a new trading day.

Taiwan Semiconductor's second-quarter performance: further increase in contribution from advanced processes.

Taiwan Semiconductor's second-quarter revenue (in New Taiwan Dollars) grew by 38.6% year-on-year and by 11.3% quarter-on-quarter to 933.792 billion New Taiwan Dollars, mainly due to strong demand for industry-leading 3-nanometer and 5-nanometer products, offsetting the adverse effects of Exchange Rates. In USD terms, revenue grew by 17.8% quarter-on-quarter to $30.1 billion, exceeding the company's previous performance guidance.

The gross margin decreased by 0.17 percentage points quarter-on-quarter to 58.62%, mainly due to exchange rates and the dilution of profit margins in overseas business, especially with the upcoming operational Arizona wafer fab. However, the increase in capacity utilization and cost improvement measures partially offset these impacts, resulting in an increase in operating profit margin of 1.12 percentage points quarter-on-quarter to 49.63%. Earnings per share were 15.36 New Taiwan Dollars, an annual growth of 60.7%, with ROI at 34.8%.

3nm products accounted for 24% of its second-quarter wafer revenue, while 5nm and 7nm accounted for 36% and 14% respectively. Products with advanced processes below 7nm accounted for 74% of its wafer revenue, up 1 percentage point from the previous quarter and 7 percentage points year-on-year, as shown in the chart below.

From a technological platform perspective, in the second quarter of 2025, the revenue share from high-performance computing further climbed to 60%, while the share for smart phones declined to 27% from 33% a year ago and 28% from the previous quarter, as shown in the chart below.

Quarter-on-quarter revenue growth in consumer electronics was the strongest at 30%, while other technology platforms generally achieved quarter-on-quarter growth. The quarter-on-quarter growth in high-performance computing and IoT was 14%, while the growth for smart phones and other industries was 7% and 6% respectively, with automotive electronics remaining flat.

In the second quarter of 2025, inventory turnover days decreased by 7 days to 76 days, primarily due to increased deliveries of N3 and N5 wafers.

Free cash flow in the second quarter decreased by 94.89 billion New Taiwan Dollars from the previous quarter to 199.85 billion New Taiwan Dollars, mainly due to income tax payments of 127.35 billion New Taiwan Dollars, resulting in a decrease in operating cash inflow.

Taiwan Semiconductor's performance guidance.

The company expects its third-quarter revenue to be between 31.8 billion and -33 billion US dollars; the gross margin is expected to be between 55.5% and 57.5%, with a median of 56.5%. Management mentioned in the earnings conference that a decrease in gross margin of 210 basis points is expected in the third quarter, mainly due to ongoing adverse exchange rate fluctuations and dilution from overseas businesses, particularly the impact of rising production from the Kumamoto and Arizona wafer fabs on costs. Operating profit margin is expected to be between 45.5% and 47.5%. The capital expenditure budget for 2025 is maintained at 38 billion to 42 billion dollars.

Taiwan Semiconductor expects that starting in 2025, the production of its overseas wafer fabs will continue to impact the overall gross margin performance over the next five years, with an expected early annual impact on profit margins between 2% and 3%, which will later expand to between 3% and 4%. However, management stated that despite the higher costs of overseas fabs, they will improve the cost structure by expanding capacity in Arizona and optimizing operations. In the long run, management believes that the gross margin can be maintained at no less than 53%.

The company expects that its leading processing technology will continue to maintain strong demand. So far, from the second half of 2025, they have not detected any changes in customer behavior. However, management also noted the awareness of certain uncertainties and risks, mainly stemming from potential tariff policy impacts, especially in consumer-related and price-sensitive market segments. At the same time, Taiwan Semiconductor is also monitoring the previously promised tax rebate plan from the United States.

Recent demand from mainland China has shown an upward trend, but management believes this is a short-term phenomenon, while still expecting a moderate recovery in the overall non-AI-related market in 2025. That said, they believe that semiconductor demand has a solid fundamental basis and will continue to remain strong. Recent developments are also favorable for the AI and long-term demand outlook. The explosive growth in data volume indicates an increasing usage and adoption rate of AI models, which requires more computing power and subsequently leads to greater demand for more advanced chips.

In addition, management stated that AI demand remains strong, including a rising demand from sovereign AI infrastructure. Therefore, underpinned by strong demand for its leading 3-nanometer and 5-nanometer technologies in the Industry, they project a 30% revenue growth (in USD) by 2025, supported by the continuous expansion of their high-performance computing (HPC) product lineup.

Regarding its major customers,$NVIDIA (NVDA.US)$ Being granted permission to resume H20 supply, the management of Taiwan Semiconductor stated at the earnings release that it is currently difficult to determine the impact, which may need to wait until the next earnings release. However, it should bring a positive effect.

Taiwan Semiconductor's capacity layout

Taiwan Semiconductor plans to invest $165 billion to build advanced semiconductor factories in the United States, which include six advanced processing wafer fabrication plants (five located in Arizona) and two advanced packaging plants, along with a research and development center.

The first wafer fab in Arizona has started volume production and will utilize N4 process technology in the fourth quarter of 2024, achieving yields comparable to those of its Taiwan fabs. The second wafer fab will use 3nm process technology and is currently making progress, expecting to achieve volume production a few quarters earlier to meet customer demand. The 2nm factory and A16 process factory have broken ground, with expectations to accelerate progress. Taiwan Semiconductor expects that when these production facilities, packaging plants, and research centers are all operational, approximately 30% of its 2nm and more advanced process capacity will be concentrated in Arizona, creating an independent semiconductor production cluster for its U.S. customers.

The special process factory in Kumamoto, Japan has started trial production by the end of 2024, achieving very good yields. The construction plan for its second special process factory in the area will also begin this year, with the specific date depending on the readiness of local infrastructure. The capacity enhancement plan will be determined based on customer demand and market conditions.

In Europe, the construction plan for the special process factory in Germany is progressing smoothly, and the capacity enhancement plan will similarly be formulated according to customer demand and market conditions.

Taiwan Semiconductor also plans to build 11 wafer fabs and 4 advanced packaging plants in Taiwan over the next few years, with preparations currently underway for the construction of 2nm wafer fabs in Hsinchu and Kaohsiung.

Taiwan Semiconductor's performance is on the rise, but its upstream suppliers.$ASML Holding (ASML.US)$ Although they also reported a reasonably good performance for the second quarter, they faced sell-offs from investors.

The uncertainty about the future from ASML has angered investors.

ASML, Taiwan Semiconductor's upstream supplier, also announced its second quarter performance for 2025 the day before, with net sales of 7.692 billion euros, a 24% year-on-year increase and a 0.65% quarterly decrease, among which the sales revenue from installed benchmark management was 2.096 billion euros, up 4.75% quarter-on-quarter. Net system sales amounted to 5.6 billion euros, including 2.7 billion euros from EUV (Extreme Ultraviolet lithography machine) sales and 2.9 billion euros from non-EUV sales.

The quarterly gross margin was 53.7%, primarily driven by increased contributions from the high-end business and lower-than-expected tariff impacts. The quarterly net income was 2.29 billion euros, a slight decrease of 2.76% year-on-year, with a net income margin of 29.8%. Earnings per share were 5.90 euros, reflecting a 47% year-on-year growth. Net order value reached 5.5 billion euros, down from 5.6 billion euros in the same period last year, but far exceeding analysts' expectations of 4.4 billion euros, including 2.3 billion euros in EUV orders.

The company expects that in 2025, system revenue from logic customers will grow compared to the previous year, due to customer expansion in advanced node capacity. System revenue from storage customers in 2025 will remain strong as they shift to new nodes to support the next generation of HBM and DDR5. Regarding the China business, it is anticipated that in 2025, revenue from the China business will account for over 25% of its total revenue. In terms of EUV business, customers continue to increase capacity in cutting-edge areas to support AI demand, with the role of extreme ultraviolet technology continuously elevating.

However, the biggest issue may lie in the uncertainties revealed by ASML Holding's management. ASML Holding is a major supplier of high-end lithography machines globally, providing equipment used in microchip production, with each high-end system costing over a hundred million dollars. It is a major beneficiary of the AI boom—demand for high-end chips has soared, thus increasing the demand for the equipment used to produce these chips. However, due to the high costs and long delivery cycles of this equipment, quarterly performance often shows significant fluctuations.

ASML Holding's management expects demand to be concentrated in the second half of the year, and they believe tariff policies will have a direct impact on: 1) system sales to their customers in the US; 2) raw material imports for their manufacturing plant in the US; 3) imports of parts and tools required for their on-site operations in the US; and 4) exports of parts from the US. The indirect effects are much more complex and difficult to define. Therefore, management anticipates their net sales in the third quarter to be between 7.4 billion euros and 7.9 billion euros, below market expectations of 8.2 billion euros, with installation base management sales around 2 billion euros and a gross margin between 50% and 52%.

Looking ahead to 2026, management indicated that they still see strong demand for logic chips and storage chips related to artificial intelligence, while also noticing the positive impact of increasing ultraviolet (UV) layers. On the other hand, based on macroeconomic and geopolitical developments, customers are facing increasing uncertainties. Additionally, some customers are facing specific challenges that may affect the timing of their capital expenditures. In this context, although the company still expects to achieve growth in 2026, confirmation at this stage is not possible.

Conclusion

Overall, the performance of Taiwan Semiconductor and ASML Holding in the second quarter of 2025 shows a stark contrast, reflecting the development trends of different segments within the semiconductor industry chain.

Taiwan Semiconductor achieved double growth in revenue and profits driven by leading advanced process technologies such as 3nm and 5nm amidst a surge in AI-driven high-performance computing demand, with its stock price reaching new highs. Its global wafer fabrication layout demonstrates confidence in the future advanced process market. Although overseas factories are putting pressure on the gross margin in the short term, the long-term technological advantages and demand support maintain strong growth momentum.

As ASML Holding, a core upstream supplier of Taiwan Semiconductor, faces investor sell-offs due to concerns over uncertainties in growth for 2026, the impact of tariff policies, and fluctuations in customer capital expenditures, despite its acceptable performance data. This disparity reflects the operational characteristics of different segments in the Industry Chain—the direct pull from a surge in end-user demand benefits Taiwan Semiconductor, while ASML is constrained by long equipment delivery cycles and a complex policy environment. It also highlights the differing pricing logic in the market regarding short-term risks and long-term potential in the Industry.

Looking ahead, the long-term growth trend of the semiconductor Industry driven by AI and high-performance computing remains unchanged. However, uncertainties such as tariff policies, geopolitical issues, and the costs of overseas expansion will continue to test the strategic response capabilities of businesses at all levels of the Industry Chain, with industry differentiation and volatility likely to become the norm.

Author: Mao Ting

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