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Can TSM Meet FY26 Margin Guidance Amid Fab Expansion Cost Pressures?
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Key Takeaways
TSM expands global fabs but faces 2%-4% margin dilution from higher overseas operating costs.
Strong AI chip demand and high utilization helped lift TSM's gross margin by 330 bps to 62.3% in Q4 2025.
TSM guides Q1 2026 gross margin at 63%-65%, supported by scale, utilization, automation and incentives.
Taiwan Semiconductor Manufacturing Company (TSM - Free Report) , also known as TSMC, has consistently delivered strong gross margins over the past few quarters despite mounting cost pressures from overseas fab expansion. To capitalize on the growing demand for advanced and artificial intelligence (AI) chips, the company is expanding production outside Taiwan, including new fabs in the United States, Japan and Europe.
In the United States alone, TSMC is investing $165 billion over the next few years to build five new state-of-the-art fabrication facilities and two advanced packaging facilities in Arizona. These facilities will boost the U.S. semiconductor supply chain for chips used in AI and high-performance computing. Apart from this, it is expanding fabrication facilities across Germany, Japan and Taiwan.
However, overseas fabs are more expensive to operate. Taiwan Semiconductor is estimating a near-term margin dilution of around 2%, which could further expand to 3-4% as production scales. Despite these pressures, TSMC’s gross margin rose 330 basis points year over year to 62.3% in the fourth quarter of 2025, showing its ability to absorb rising costs while sustaining profitability.
For the first quarter of 2026, management expects gross margin between 63% and 65%. The midpoint of the guidance range depicts a year-over-year improvement of 520 basis points. Taiwan Semiconductor is betting that scale, automation and government incentives will eventually close the cost gap. We believe that the robust demand for advanced nodes and high factory utilization will help the company meet its 2026 gross margin targets.
Taiwan Semiconductor’s revenues grew 25.5% year over year to $33.73 billion in the fourth quarter. Analysts believe the momentum will continue in the years ahead, considering the company’s global expansion strategy and the rising demand for AI and advanced computing chips. The Zacks Consensus Estimate for 2026 and 2027 revenues indicates year-over-year growth of 34.9% and 22.9%, respectively.
How TSM’s Rivals Fare in AI Chip Making Race
Intel (INTC - Free Report) and GlobalFoundries (GFS - Free Report) are also expanding their presence in AI chip manufacturing.
Intel is investing heavily in its foundry business, aiming to produce advanced chips. The company is currently focusing on its 18A process, which signifies 1.8nm chips. Intel’s 18A process is claimed to have higher performance and efficiency, which will help INTC better compete with Taiwan Semiconductor’s upcoming N2 chips.
GlobalFoundries focuses more on mature nodes. The company is witnessing some AI-related demand, especially in edge computing and embedded AI. GlobalFoundries is working to expand capacity in the United States and Europe to attract customers looking for supply-chain flexibility.
TSM’s Share Price Performance, Valuation and Estimates
Shares of Taiwan Semiconductor have surged around 117% over the past year compared with the Zacks Computer and Technology sector’s appreciation of 39.1%.
From a valuation standpoint, TSM trades at a forward price-to-earnings ratio of 22.47, slightly higher than the sector’s average of 22.17.
Taiwan Semiconductor Forward 12-Month P/E Ratio
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for Taiwan Semiconductor’s 2026 and 2027 earnings implies a year-over-year increase of 34.9% and 22.9%, respectively. The consensus mark for 2026 and 2027 earnings has been revised upward over the past 30 days.
View the Zacks #1 Rank List
Image: Bigstock
Can TSM Meet FY26 Margin Guidance Amid Fab Expansion Cost Pressures?
Key Takeaways
Taiwan Semiconductor Manufacturing Company (TSM - Free Report) , also known as TSMC, has consistently delivered strong gross margins over the past few quarters despite mounting cost pressures from overseas fab expansion. To capitalize on the growing demand for advanced and artificial intelligence (AI) chips, the company is expanding production outside Taiwan, including new fabs in the United States, Japan and Europe.
In the United States alone, TSMC is investing $165 billion over the next few years to build five new state-of-the-art fabrication facilities and two advanced packaging facilities in Arizona. These facilities will boost the U.S. semiconductor supply chain for chips used in AI and high-performance computing. Apart from this, it is expanding fabrication facilities across Germany, Japan and Taiwan.
However, overseas fabs are more expensive to operate. Taiwan Semiconductor is estimating a near-term margin dilution of around 2%, which could further expand to 3-4% as production scales. Despite these pressures, TSMC’s gross margin rose 330 basis points year over year to 62.3% in the fourth quarter of 2025, showing its ability to absorb rising costs while sustaining profitability.
For the first quarter of 2026, management expects gross margin between 63% and 65%. The midpoint of the guidance range depicts a year-over-year improvement of 520 basis points. Taiwan Semiconductor is betting that scale, automation and government incentives will eventually close the cost gap. We believe that the robust demand for advanced nodes and high factory utilization will help the company meet its 2026 gross margin targets.
Taiwan Semiconductor’s revenues grew 25.5% year over year to $33.73 billion in the fourth quarter. Analysts believe the momentum will continue in the years ahead, considering the company’s global expansion strategy and the rising demand for AI and advanced computing chips. The Zacks Consensus Estimate for 2026 and 2027 revenues indicates year-over-year growth of 34.9% and 22.9%, respectively.
How TSM’s Rivals Fare in AI Chip Making Race
Intel (INTC - Free Report) and GlobalFoundries (GFS - Free Report) are also expanding their presence in AI chip manufacturing.
Intel is investing heavily in its foundry business, aiming to produce advanced chips. The company is currently focusing on its 18A process, which signifies 1.8nm chips. Intel’s 18A process is claimed to have higher performance and efficiency, which will help INTC better compete with Taiwan Semiconductor’s upcoming N2 chips.
GlobalFoundries focuses more on mature nodes. The company is witnessing some AI-related demand, especially in edge computing and embedded AI. GlobalFoundries is working to expand capacity in the United States and Europe to attract customers looking for supply-chain flexibility.
TSM’s Share Price Performance, Valuation and Estimates
Shares of Taiwan Semiconductor have surged around 117% over the past year compared with the Zacks Computer and Technology sector’s appreciation of 39.1%.
Taiwan Semiconductor One-Year Price Return Performance
Image Source: Zacks Investment Research
From a valuation standpoint, TSM trades at a forward price-to-earnings ratio of 22.47, slightly higher than the sector’s average of 22.17.
Taiwan Semiconductor Forward 12-Month P/E Ratio
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for Taiwan Semiconductor’s 2026 and 2027 earnings implies a year-over-year increase of 34.9% and 22.9%, respectively. The consensus mark for 2026 and 2027 earnings has been revised upward over the past 30 days.
Image Source: Zacks Investment Research
Taiwan Semiconductor currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.