Key Points
TSMC spooked the stock market this morning, warning of heavier spending on capital investment.
Free cash flow is taking a hit, and semiconductor investors are nervous.
The SOXL ETF can incur huge losses when its semiconductor component stocks suffer even minor declines.
It's Thursday, 2:30 p.m., and do you know where the Nasdaq is?
It's down about 1.3% -- but the Direxion Daily Semiconductor Bull 3X Shares ETF (NYSEMKT: SOXL) is down much, much more, collapsing 14.5% as investors react to some caveats in Taiwan Semiconductor Manufacturing Company's (NYSE: TSM) otherwise blockbuster Q2 earnings report.
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TSMC spooks the market
On the surface, everything seems to be going swimmingly for TSMC. Q2 revenue jumped 33% to $39.4 billion. Profits did even better, blowing past analyst estimates by growing 77% year over year to $21.9 billion.
Free cash flow came in significantly weaker than reported earnings, however, at just $8.9 billion, according to S&P Global Market Intelligence data, as TSMC continued to invest heavily to increase production of semiconductor chips -- and that's where TSMC spooked the market.
Prior to reporting earnings, TSMC had told investors it would need to spend about $54 billion this year on capital investment. Now it thinks it will need to spend $60 billion or more.
3x the risk, 3x the gain
Semiconductor investors worry that all this spending is proof that artificial intelligence is too expensive -- that the cost of building chip factories and manufacturing AI chips won't ever be recouped through selling AI services, and the whole AI revolution could short-circuit as a result. Shares of Nvidia (NASDAQ: NVDA), Micron (NASDAQ: MU), and Intel (NASDAQ: INTC) -- all components of the SOXL ETF -- are falling single-digits today.
Unfortunately for investors, because SOXL intentionally triples its exposure to these stocks, its losses today are multiples of the individual stocks' losses, and SOXL is down double digits.
That's the risk you take, though, when you invest in this heavily leveraged bet on semiconductors: Big risks, big (negative) rewards when the bet goes wrong.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel, Micron Technology, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.