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

Core Insights - Taiwan Semiconductor Manufacturing Company (TSMC) is expanding production outside Taiwan to meet the growing demand for advanced and AI chips, which will help diversify its supply chain and mitigate geopolitical risks [1][3] Financial Performance - TSMC's gross margin increased by 330 basis points year over year to 62.3% in Q4 2025, despite facing near-term margin dilution of 2% to 4% due to higher operational costs at overseas fabs [2][9] - For Q1 2026, TSMC expects a gross margin between 63% and 65%, indicating a year-over-year improvement of 520 basis points [3] - Revenues for Q4 2025 grew by 25.5% year over year to $33.73 billion, driven by strong demand for AI and advanced nodes [4][9] Market Position and Competitors - TSMC's share price has surged approximately 95.5% over the past year, outperforming the Zacks Computer and Technology sector, which gained 26.9% [7] - Competitors like Intel and GlobalFoundries are also expanding in the AI chip market, with Intel focusing on its 18A process for advanced chips and GlobalFoundries targeting mature nodes [5][6] Valuation and Earnings Estimates - TSMC trades at a forward price-to-earnings ratio of 25.25, slightly below the sector average of 25.5 [11] - The Zacks Consensus Estimate for TSMC's earnings indicates a year-over-year increase of 32.8% for 2026 and 24.4% for 2027, with recent upward revisions in estimates [14]