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Taiwan Semiconductor's Gross Margin Improves: What Lies Ahead?
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Key Takeaways
Taiwan Semiconductor posted a 66.2% Q1 gross margin, beating the high end of guidance by 120 bps.
TSM expects Q2 gross margin of 66.5% at midpoint, helped by utilization and cost improvements.
Taiwan Semiconductor expects N3 gross margin to reach the corporate average in the second half.
Taiwan Semiconductor Manufacturing Company (TSM - Free Report) reported a first-quarter 2026 gross margin of 66.2%, up 390 basis points (bps) sequentially. The improvement was driven by cost reduction efforts, a higher overall capacity utilization rate and a more favorable foreign exchange rate. Gross margin also exceeded the high end of management’s guidance by 120 bps. For the second quarter, TSM expects gross margin to increase by 30 bps to 66.5% at the midpoint, benefiting from higher utilization and ongoing cost improvement efforts, but partially offset by dilution from its overseas fabs.
Beyond the second quarter, the company expects several factors to influence profitability during the back half of 2026. The initial ramp-up of its 2-nanometer technology is projected to dilute full-year gross margin by 2% to 3%. The expanding overseas manufacturing capacity is expected to create gross margin dilution of 2% to 3% in the early stages, increasing to 3% to 4% as those facilities scale over the coming years.
Taiwan Semiconductor also indicated that recent developments in the Middle East could raise prices for certain chemicals and gases, although it is too early to estimate the potential financial impact. The company aims to generate more wafer output through enhanced manufacturing productivity and drive greater cross-node capacity optimization in its fab operations to support profitability. TSM expects N3 gross margin to cross over to the corporate average in the second half of the year. Foreign exchange movements remain another factor that could influence profitability.
TSM’s Peer Updates
Advanced Micro Devices (AMD - Free Report) announced plans to invest up to £2 billion over the next five years in the United Kingdom to accelerate AI innovation and research, and expand access to the compute resources needed for long-term economic growth and scientific leadership across the country. Building on its recently announced work with Oxford Quantum Circuits (OQC) and JPMorganChase, AMD also announced a collaboration with Imperial College London to advance computational science and support research that relies on large-scale computing resources, including healthcare innovation and climate modeling.
ON Semiconductor (ON - Free Report) , now branded as onsemi, entered into a definitive agreement to acquire Synaptics in an all-stock transaction, representing a total enterprise value of approximately $7 billion. By adding Synaptics’ differentiated Edge AI compute franchise and strong portfolio of human-machine interface and wireless connectivity solutions, onsemi is expected to extend its capabilities beyond power and sensing to intelligent systems. The combined platform is intended to position onsemi at the center of Physical AI, with the potential to expand onsemi’s TAM by $30 billion to $243 billion by 2030.
In terms of valuation, TSM trades at a forward, five-year Price/Sales (P/S) of 12.25X compared with its 8.12X median and the industry average of 12.25X.
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Take a look at how estimates for Taiwan Semiconductor’s 2026 and 2027 earnings are shaping up.
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Taiwan Semiconductor's Gross Margin Improves: What Lies Ahead?
Key Takeaways
Taiwan Semiconductor Manufacturing Company (TSM - Free Report) reported a first-quarter 2026 gross margin of 66.2%, up 390 basis points (bps) sequentially. The improvement was driven by cost reduction efforts, a higher overall capacity utilization rate and a more favorable foreign exchange rate. Gross margin also exceeded the high end of management’s guidance by 120 bps. For the second quarter, TSM expects gross margin to increase by 30 bps to 66.5% at the midpoint, benefiting from higher utilization and ongoing cost improvement efforts, but partially offset by dilution from its overseas fabs.
Beyond the second quarter, the company expects several factors to influence profitability during the back half of 2026. The initial ramp-up of its 2-nanometer technology is projected to dilute full-year gross margin by 2% to 3%. The expanding overseas manufacturing capacity is expected to create gross margin dilution of 2% to 3% in the early stages, increasing to 3% to 4% as those facilities scale over the coming years.
Taiwan Semiconductor also indicated that recent developments in the Middle East could raise prices for certain chemicals and gases, although it is too early to estimate the potential financial impact. The company aims to generate more wafer output through enhanced manufacturing productivity and drive greater cross-node capacity optimization in its fab operations to support profitability. TSM expects N3 gross margin to cross over to the corporate average in the second half of the year. Foreign exchange movements remain another factor that could influence profitability.
TSM’s Peer Updates
Advanced Micro Devices (AMD - Free Report) announced plans to invest up to £2 billion over the next five years in the United Kingdom to accelerate AI innovation and research, and expand access to the compute resources needed for long-term economic growth and scientific leadership across the country. Building on its recently announced work with Oxford Quantum Circuits (OQC) and JPMorganChase, AMD also announced a collaboration with Imperial College London to advance computational science and support research that relies on large-scale computing resources, including healthcare innovation and climate modeling.
ON Semiconductor (ON - Free Report) , now branded as onsemi, entered into a definitive agreement to acquire Synaptics in an all-stock transaction, representing a total enterprise value of approximately $7 billion. By adding Synaptics’ differentiated Edge AI compute franchise and strong portfolio of human-machine interface and wireless connectivity solutions, onsemi is expected to extend its capabilities beyond power and sensing to intelligent systems. The combined platform is intended to position onsemi at the center of Physical AI, with the potential to expand onsemi’s TAM by $30 billion to $243 billion by 2030.
TSM’s Price Performance, Valuation and Earnings
Over the past 12 months, Taiwan Semiconductor shares have surged 89.1%, in line with the Zacks Semiconductor - Circuit Foundry industry.
Image Source: Zacks Investment Research
In terms of valuation, TSM trades at a forward, five-year Price/Sales (P/S) of 12.25X compared with its 8.12X median and the industry average of 12.25X.
Image Source: Zacks Investment Research
Take a look at how estimates for Taiwan Semiconductor’s 2026 and 2027 earnings are shaping up.
Image Source: Zacks Investment Research
Taiwan Semiconductor currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.