TSM's Overseas Fabrication Push Ramps Up: Are Margins Sustainable?
TSM
) is moving forward with its global manufacturing expansion to meet demand for advanced process technologies. In March 2025, the company raised its planned U.S. investment to $165 billion. This includes six advanced wafer fabs, two advanced packaging facilities, and a major R&D center in Arizona. The expansion will enable TSM to scale up to a GIGAFAB cluster in Arizona to support its leading-edge customers in smartphones, AI, and HPC applications.
The company is also expanding in Japan. Taiwan Semiconductor's first Kumamoto specialty fab in Japan has already begun production in late 2024 with good yields, focusing on Complementary Metal-Oxide-Semiconductor sensors and automotive chips. Moreover, a second fab in Kumamoto is set to begin construction later this year, pending infrastructure readiness. In Europe, Taiwan Semiconductor plans for a specialty technology fab in Dresden, Germany.
This global push is aimed at securing leadership in advanced chip manufacturing and addressing geopolitical concerns through supply chain diversification. However, this massive investment strategy is anticipated to hurt Taiwan Semiconductor's profitability. TSM expects gross margins to shrink 2-3% in 2025 as it ramps up new fabs in the United States and Japan. It also expects the gross margin dilution to widen to 3-4% annually in later years due to the ramp-up of its other overseas fabs.
This impact has already begun. In the second quarter of 2025, TSM's gross margin declined 20 basis points sequentially and forecasts further contraction by 210 basis points sequentially in the third quarter. With $38-$42 billion in CapEx planned for 2025, the company's execution and cost discipline will remain critical for protecting its margins. Nonetheless, Taiwan Semiconductor remains confident of sustaining a long-term gross margin above 53%.
How TSM's Rivals are Responding to the Global Fab Race
While Taiwan Semiconductor leads the global foundry market, Intel (
INTC
) and GlobalFoundries (
GFS
) are stepping up their efforts as the demand for localized chip manufacturing grows.
Intel is undergoing a major transformation under its IDM 2.0 strategy. With a planned investment of $100 billion for new fabs in the United States and Europe, Intel aims to compete directly with Taiwan Semiconductor in advanced chip production. Its upcoming foundry services, backed by U.S. government support, are designed to appeal to customers looking for geopolitically safer and more diversified supply chains.
GlobalFoundries is carving out its space in mature and specialized nodes. It is expanding capacity in the United States, Germany, and Singapore to meet demand for automotive, IoT, and industrial chips. As clients seek trusted, local manufacturing partners, GlobalFoundries stands to benefit.
Taiwan Semiconductor's edge remains strong, but both Intel and GlobalFoundries are making moves that could tighten the competitive landscape.
TSM's Share Price Performance, Valuation and Estimates
Shares of Taiwan Semiconductor have risen around 22.3% year to date compared with the Zacks Computer and Technology sector's growth of 13.8%.
TSM YTD Price Return Performance
Image Source: Zacks Investment Research
From a valuation standpoint, TSM trades at a forward price-to-earnings ratio of 23.13, lower than the sector's average of 28.19.
TSM Forward 12-Month P/E Ratio
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for Taiwan Semiconductor's 2025 and 2026 earnings implies a year-over-year increase of 36.9% and 13.1%, respectively. Estimates for 2025 and 2026 have been revised downwards in the past seven 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.
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This article originally published on Zacks Investment Research (zacks.com).
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