Can TSMC Maintain Gross Margin Strength Despite Its Ambitious Global Buildout?

Taiwan Semiconductor Manufacturing Company (TSMC/TSM) is navigating a critical balancing act: expanding manufacturing capacity across the United States, Japan, and Germany while defending its margin profile amid elevated overseas production costs. The strategy addresses surging demand for artificial intelligence and advanced computing chips, but creates near-term profitability headwinds that investors must closely monitor.

The raw numbers tell a compelling story. TSMC’s third-quarter 2025 revenues surged 40.8% year-over-year to $33.1 billion, yet the company managed to expand gross margin by 170 basis points to 59.5%—a remarkable feat considering the structural cost disadvantages of international fab operations. Management guided fourth-quarter gross margin at 59-61%, suggesting a 100 basis-point year-over-year improvement at the midpoint.

The Margin Challenge: Near-Term Pain, Long-Term Gain

Taiwan Semiconductor estimates its overseas expansion will compress gross margin by approximately 2% in the near term, potentially widening to 3-4% as new facilities scale production. Yet this headwind hasn’t materialized in recent results, raising questions about the company’s cost management capabilities and pricing power in a supply-constrained AI market.

The company’s thesis rests on three pillars: manufacturing scale, automation advances, and government subsidies will eventually eliminate the cost gap between Taiwan-based and overseas production. TSMC is banking on global customers’ willingness to pay premium prices for regionally diversified supply of cutting-edge nodes like 2nm and A16, offsetting higher operational costs abroad.

Market Momentum and Forward Expectations

TSMC’s 54.1% year-to-date share price appreciation significantly outpaced the Computer and Technology sector’s 28.9% gain, reflecting investor confidence in its AI-driven growth narrative. From a valuation standpoint, TSM trades at a forward price-to-earnings multiple of 25.06, below the sector average of 29.03—suggesting the market hasn’t fully priced in the company’s expansion execution risk.

The Zacks Consensus Estimate projects TSMC’s 2025 and 2026 revenues will grow 33.7% and 20.6% year-over-year respectively. Earnings estimates for both years have faced downward revisions in the past 30 days, hinting at investor caution around margin sustainability and execution risks tied to new fab ramp-up.

The Competitive Landscape Intensifies

Intel (INTC) and GlobalFoundries (GFS) are aggressively building foundry capacity to capture AI chip demand. Intel’s 18A process (1.8nm equivalent) claims superior performance and efficiency metrics, positioning it as a potential challenger to TSMC’s N2 roadmap. GlobalFoundries, focused on mature nodes, is expanding U.S. and European capacity to appeal to customers prioritizing supply-chain resilience and geographic diversification.

TSMC maintains significant competitive advantages through process technology leadership, production scale, and established customer relationships. However, geopolitical incentives driving domestic semiconductor investment globally mean rivals will have more resources and government support to close technical gaps.

The Bottom Line

Taiwan Semiconductor is executing an aggressive but necessary strategy to fortify its market position in the AI era. Whether the company can sustain gross margin near current levels while absorbing international expansion costs will determine whether the global buildout enhances or dilutes long-term shareholder value. Investors should monitor quarterly gross margin trends closely—sustained margin resilience would validate management’s execution narrative, while unexpected compression could signal structural headwinds the company underestimated.

TSMC currently carries a Zacks Rank #2 (Buy) rating, reflecting cautious optimism about its growth prospects tempered by execution uncertainty.