TSMC's Cost-Conscious Chip Strategy Pays Off as Shares Near Record

TSMC confirms it will avoid ASML's costly High-NA EUV tools until at least 2029, prioritizing margins amid record revenue and AI-driven expansion.

The world's largest contract chipmaker is proving that sometimes the smartest move is the one you don't make. Taiwan Semiconductor Manufacturing Co. has confirmed it will skip ASML's next-generation High-NA EUV lithography machines — priced at over €350 million each — until at least 2029, a decision analysts say protects margins rather than signals technological weakness.

The strategy is already showing results. TSMC's stock has surged nearly 34% over the past month to around $391, hovering just below the all-time high of roughly $405 set in late April. Year-to-date, shares have climbed more than 43%, fueled by blockbuster quarterly earnings and a sharply upgraded annual outlook.

Record Quarter Fuels Expansion

First-quarter revenue jumped 35% year-over-year to nearly $35.9 billion, while gross margin hit 66.2% — exceeding management's own guidance. Advanced technologies now account for almost three-quarters of total wafer revenue, cementing TSMC's dominance with an estimated market share above 70%. Samsung trails in the low single digits.

The company is racing to scale its 2-nanometer production faster than the market anticipated, driven by insatiable demand for AI accelerators. Five new fabrication plants are ramping up simultaneously. By the end of 2026, TSMC targets:
- 3nm capacity: 180,000 wafers per month
- 2nm capacity: 100,000 wafers per month
- Yield rates of 80% to 90% for both processes

To fund this expansion, TSMC recently sold its remaining stake in Arm Holdings for roughly $231 million — a portfolio move that frees up capital for internal fab construction.

The High-NA Calculus

Kevin Zhang, TSMC's deputy co-chief operating officer, offered a blunt explanation for skipping ASML's most advanced machines: "It's too expensive." Speaking at the North America Technology Symposium, Zhang expressed surprise that TSMC's research team had managed to continue scaling with existing EUV generation tools.

The financial logic is straightforward. Avoiding machines that cost €350 million each preserves capital and bolsters margins. TSMC's upcoming A13 and A12 process nodes, both slated for 2029, don't require High-NA EUV technology. Intel, by contrast, plans to deploy the machines for its 14A node as early as 2027 or 2028.

Bernstein analysts called the decision "no surprise," noting TSMC had already signaled last year it wouldn't use High-NA EUV for the A14 node. The base case had always called for introduction at the A10 node in 2030, with speculation about earlier use for certain layers in 2029 being "rather speculative" without concrete evidence.

What It Means for ASML

For ASML, TSMC's caution is a headwind but not an existential threat. The Dutch equipment maker had counted on broad adoption of its High-NA systems between 2027 and 2028, targeting annual revenue of up to €60 billion by 2030. Whether that goal remains achievable without TSMC as an early big-ticket customer may pressure Wall Street consensus estimates.

Valuation and Outlook

TSMC's historical price-to-earnings ratio ranges from 20 to 30, according to Cathay Futures analyst Tsai Ming-han. The stock currently trades below 25 times expected annual earnings — within that historical band. None of the 17 analysts covering the stock recommend selling, with the average price target at $463.

The next ex-dividend date is set for June 11. Meanwhile, TSMC is also expanding its advanced packaging capacity by 80% through 2027, responding to exploding demand for chip-stacking technologies used in AI and mobile applications. The company recently unveiled its A13 node, a refined architecture targeting both AI and mobile chips.

For now, TSMC's bet is that process integration and cost discipline will win out over the race for the most expensive tools — and the market appears to agree.