Can TSM Sustain Gross Margin Improvement Amid Overseas Expansion?

Core Insights - Taiwan Semiconductor Manufacturing Company (TSMC) is maintaining strong profitability while expanding its manufacturing capabilities internationally, including new fabs in the United States, Japan, and Germany [1][2]. Financial Performance - TSMC's revenues increased by 40.8% year over year to $33.1 billion in Q3 2025, with expectations of continued growth driven by global expansion and rising demand for AI and advanced computing chips [5]. - The company's gross margin rose 170 basis points year over year to 59.5% in Q3 2025, despite anticipated near-term margin dilution of around 2% due to higher operational costs at overseas fabs [3][9]. - For Q4 2025, TSMC expects a gross margin between 59% and 61%, indicating a year-over-year improvement of 100 basis points at the midpoint of the guidance range [4][9]. Market Position and Competitors - TSMC's competitors, including Intel and GlobalFoundries, are also expanding in the AI chip manufacturing space, with Intel focusing on advanced chips and GlobalFoundries targeting mature nodes and edge computing [6][7]. - TSMC's share price has increased approximately 54.1% year to date, outperforming the Zacks Computer and Technology sector's gain of 28.9% [8]. Valuation and Earnings Estimates - TSMC trades at a forward price-to-earnings ratio of 25.06, which is lower than the sector average of 29.03 [10]. - The Zacks Consensus Estimate for TSMC's earnings indicates a year-over-year increase of 43.9% for 2025 and 20.2% for 2026, although estimates have been revised downward in the past 30 days [11].