Can TSMC's Overseas Push Sustain Its Gross Margin Advantage?

Taiwan Semiconductor Manufacturing Company (TSMC) is walking a tightrope—ramping up global chip production while wrestling with the rising costs of international operations. The chipmaker continues executing an ambitious expansion plan across the US, Japan, and Germany to serve surging demand for AI and advanced computing chips, but this geographic diversification comes with a catch.

The reality check: TSMC expects its gross margin to compress by 2% in the near term, potentially widening to 3-4% as overseas facilities scale production. Yet here’s what makes the story compelling—in Q3 2025, the company actually grew its gross margin by 170 basis points year-over-year to hit 59.5%, defying expectations that global expansion would immediately squeeze profitability.

Revenues Tell the Real Story

TSMC’s Q3 2025 revenue surge to $33.1 billion (up 40.8% year-over-year) shows the company is more than compensating for margin pressures through volume growth. Management guided Q4 gross margin between 59% and 61%, with the midpoint suggesting another 100 basis points of year-over-year expansion. This dual-track performance—maintaining pricing power while absorbing operational headwinds—is the real test of TSMC’s competitive moat.

The company’s thesis is straightforward: automation, scale economies, and government subsidies will eventually level the playing field between Taiwan and overseas fabs. As demand for next-gen nodes like 2nm accelerates, regional supply diversification becomes a strategic advantage worth the temporary margin hit.

The Competition Intensifies

Intel (INTC) and GlobalFoundries (GFS) aren’t sitting idle. Intel is racing ahead with its 18A process (1.8nm equivalent), claiming superior performance and efficiency against TSMC’s upcoming N2 technology. GlobalFoundries, meanwhile, is carving out a niche in mature nodes and edge AI applications, expanding capacity across the US and Europe to capture customers desperate for supply-chain hedging.

This competitive pressure means TSMC can’t afford complacency—maintaining gross margin leadership while investing in global manufacturing is the only viable long-term strategy.

What the Street Expects

TSM shares have climbed 54.1% year-to-date, significantly outpacing the broader tech sector’s 28.9% gain. Trading at a 25.06 forward P/E ratio below the sector average of 29.03, the valuation remains reasonable given consensus estimates for 2025-2026 earnings growth of 43.9% and 20.2%, respectively.

The key question for investors: Can TSMC maintain its gross margin resilience as overseas production scales? The answer will determine whether today’s valuation is a bargain or a trap.