How TSMC Can Sustain Profitability While Expanding Internationally

Taiwan Semiconductor Manufacturing Company (TSMC or TSM) is navigating a critical challenge: maintaining strong profit margins while rolling out manufacturing facilities across the United States, Japan, and Germany. The contract chipmaker is committed to diversifying its production footprint to capture growing demand for artificial intelligence and advanced computing chips, while reducing vulnerability to geopolitical disruptions. Yet this global ambition comes with a steep price tag.

The Cost of Going Global

Building advanced semiconductor fabs outside Taiwan is significantly more expensive than domestic production. TSMC projects that near-term margin compression could reach approximately 2%, with potential expansion to 3-4% as these overseas plants ramp up production volumes. This represents a meaningful headwind for a company accustomed to industry-leading profitability.

However, TSMC’s latest results suggest the chipmaker possesses the operational muscle to weather these pressures. In the third quarter of 2025, gross margin expanded 170 basis points year-over-year to 59.5%—a remarkable achievement amid inflationary pressures. Management guidance for Q4 2025 calls for gross margin between 59% and 61%, with the midpoint representing a 100 basis-point year-over-year gain.

The Path to Margin Sustainability

How does TSMC plan to sustain these margins despite higher overseas operating costs? The company is banking on three key levers: manufacturing scale, automation investments, and government incentives in target regions. As production volumes increase at U.S., Japanese, and German facilities, per-unit costs should decline substantially. TSMC management believes this strategy will pay dividends, particularly as global customers actively seek regionally diversified suppliers for cutting-edge nodes such as 2nm technology.

Revenue momentum supports this optimism. TSMC’s top line grew 40.8% year-over-year to $33.1 billion in Q3 2025. The Zacks Consensus Estimate projects further acceleration, with 2025 revenues expected to rise 33.7% and 2026 revenues anticipated to increase 20.6% year-over-year.

Earnings and Stock Valuation

Profitability is accelerating even faster than revenue. Consensus estimates for 2025 and 2026 earnings imply year-over-year growth rates of 43.9% and 20.2%, respectively. (Note: Recent estimate revisions have been mixed, with downward adjustments in the past 30 days.)

From a valuation lens, TSMC trades at a forward price-to-earnings multiple of 25.06, below the broader Computer and Technology sector average of 29.03. Shares have rallied 54.1% year-to-date versus the sector’s 28.9% gain. The company currently holds a Zacks Rank #2 (Buy) rating.

Competitive Pressures Mount

TSMC’s expansion strategy is drawing responses from rivals. Intel (INTC) is scaling its foundry ambitions with renewed focus on its 18A process node, which represents 1.8nm-class technology. Intel claims the 18A node delivers superior performance and efficiency compared to TSMC’s upcoming N2 offering.

GlobalFoundries (GFS) is taking a different approach, emphasizing mature-node production while capturing edge computing and embedded AI applications. The company is ramping U.S. and European capacity to appeal to customers prioritizing supply-chain resilience.

Sustainability in Question

The central question for investors remains clear: Can TSMC sustain its margin leadership and earnings growth trajectory as it invests heavily in a global manufacturing footprint? The latest quarterly results offer an encouraging data point, but the true test will emerge as overseas fabs move into higher-utilization phases over the next 1-2 years.