Can TSM Sustain 60%+ Gross Margin Amid Overseas Fab Expansion?

Taiwan Semiconductor Manufacturing Company TSM, also known as TSMC, has consistently delivered strong gross margins, supported by robust demand for advanced nodes and high factory utilization. To capitalize on the growing demand for advanced and artificial intelligence (AI) chips, the company is expanding production outside Taiwan, including new fabs in the United States, Japan and Europe. The strategy will also aid TSMC in building a diversified semiconductor supply chain and hedge against geopolitical tensions that could disrupt its supply chain.

However, overseas fabs are more expensive to operate. Taiwan Semiconductor is estimating a near-term margin dilution of around 2%, which could further expand to 3-4% as production scales. Despite these pressures, TSMC’s gross margin rose 330 basis points year over year to 62.3% in the fourth quarter of 2025, showing its ability to absorb rising costs while sustaining profitability.

For the first quarter of 2026, management expects gross margin between 63% and 65%. The midpoint of the guidance range depicts a year-over-year improvement of 520 basis points. Taiwan Semiconductor is betting that scale, automation and government incentives will eventually close the cost gap. The company believes that the investment will pay off as global customers seek reliable, regionally diversified suppliers for advanced nodes like 2nm and A16.

Taiwan Semiconductor’s revenues grew 25.5% year over year to $33.73 billion in the fourth quarter. Analysts believe the momentum will continue in the years ahead, considering the company’s global expansion strategy and the rising demand for AI and advanced computing chips. The Zacks Consensus Estimate for 2026 and 2027 revenues indicates year-over-year growth of 29.2% and 24.8%, respectively.

TSMC’s Rivals in the AI Chip Making Race

Intel INTC and GlobalFoundries GFS are also expanding their presence in AI chip manufacturing.

Intel is investing heavily in its foundry business, aiming to produce advanced chips. The company is currently focusing on its 18A process, which signifies 1.8nm chips. Intel’s 18A process is claimed to have higher performance and efficiency, which will help the company better compete with Taiwan Semiconductor’s upcoming N2 chips.

GlobalFoundries focuses more on mature nodes. The company is witnessing some AI-related demand, especially in edge computing and embedded AI. GlobalFoundries is working to expand capacity in the United States and Europe to attract customers looking for supply-chain flexibility.

TSM’s Share Price Performance, Valuation and Estimates

Shares of Taiwan Semiconductor have surged around 95.5% over the past year compared with the Zacks Computer and Technology sector’s gain of 26.9%.

Taiwan Semiconductor One-Year Price Return Performance

Image Source: Zacks Investment Research

From a valuation standpoint, TSM trades at a forward price-to-earnings ratio of 25.25, lower than the sector’s average of 25.5.

Taiwan Semiconductor Forward 12-Month P/E Ratio

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for Taiwan Semiconductor’s 2026 and 2027 earnings implies a year-over-year increase of 32.8% and 24.4%, respectively. Estimates for 2026 and 2027 have been revised upward in the past 30 days.

Image Source: Zacks Investment Research

Taiwan Semiconductor currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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