In-Depth Analysis of TSMC (TSM)'s Advanced Process Gross Margin and Profitability

Based on the latest financial data and market information, I will provide you with an in-depth analysis of the profitability and sustainability of TSMC’s 62.3% gross margin from advanced processes.

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TSMC’s Q4 2025 earnings report, released on January 15, 2026, shows that the company achieved

, representing a 5.7% quarter-over-quarter increase and a 20.5% year-over-year increase[0][1]. Most notably, the , a significant increase of 280 basis points from Q3’s 59.5% and 330 basis points from Q4 2024’s 59.0%[1]. This gross margin not only set a new company record but also far exceeded market expectations.

On a full-year basis, TSMC achieved a gross margin of 59.9% in 2025, an increase of 380 basis points from 2024’s 56.1%[1]. The company’s net profit reached NT$171.788 billion, growing 46.4% year-over-year; earnings per share (EPS) jumped from NT$45.25 in 2024 to NT$66.25, also recording a 46.4% increase[1]. The net profit margin rose from 40.5% in 2024 to 45.1% in 2025, demonstrating a strong trend of profitability expansion[1].

TSMC’s CFO clearly stated on the earnings call that the 280 basis point increase in Q4 gross margin was mainly driven by three factors:

[1][2]. The company has continued to invest in manufacturing process optimization, yield improvement, and operational efficiency, and these efforts were concentratedly reflected in significant cost-side improvements in the fourth quarter. Notably, the actual gross margin of 62.3% exceeded the upper end of the company’s 59.0%-61.0% guidance range given three months prior by 130 basis points, mainly due to better-than-expected cost improvement results[1].

TSMC’s technological leadership in advanced processes provides solid support for its high gross margin. According to the company’s disclosure,

[0], a product mix that allows the company to fully benefit from technology premiums. The 3nm process entered mass production in 2025, providing high-performance chip manufacturing services for key customers such as Apple, NVIDIA, and AMD. The 5nm process continues to be the company’s main revenue contributor, with continuous yield improvements driving down unit costs.

Against the backdrop of explosive growth in AI chip demand, TSMC’s advanced packaging and advanced process capacities have maintained high utilization rates. The company confirmed in its earnings report that overall capacity utilization improved significantly in the fourth quarter, with demand for AI-related products in particular keeping 8-inch and 12-inch fabs running at full capacity. The improvement in capacity utilization directly dilutes fixed costs and enhances the profitability of each unit of product.

TSMC’s technological lead in semiconductor manufacturing is expanding. The company is the world’s only pure-play foundry to achieve mass production of the 3nm process, and R&D on the 2nm process is progressing smoothly, with risk production expected to start by the end of 2025. This

leaves the company with almost no competitors in the high-end chip market, allowing it to continuously capture technology premiums. According to industry analysis, TSMC leads its main competitors Samsung and Intel by one to two generations in terms of advanced process yield and production efficiency[3].

Leveraging its technological advantages and production scale, TSMC holds a dominant position in pricing negotiations with customers. The company has successfully achieved

—absorbing the higher initial costs of new processes by increasing product prices while maintaining or even improving gross margin levels. The company’s key customers include global top tech firms such as Apple, NVIDIA, AMD, Qualcomm, and Broadcom, which have strong rigid demand for advanced process chips, providing TSMC with a solid foundation for pricing power.

Semiconductor manufacturing is a typical capital-intensive industry, and TSMC’s

are an important support for its high gross margin. The company’s 2025 capital expenditure reached $38-42 billion, and it plans to further increase it to $52-56 billion in 2026[2][3]. Large-scale capital expenditure enables the company to:

• Achieve economies of scale in equipment procurement
• Dilute R&D costs
• Improve capacity utilization
• Accelerate the yield ramp-up curve

For 2026, TSMC’s management has provided

: it expects full-year revenue to grow approximately 30% year-over-year in USD terms, with gross margin further rising to 63%-65%[2]. This guidance means the company’s gross margin will continue to increase by 300-500 basis points on top of 2025’s 59.9%, reflecting management’s strong confidence in sustained growth in AI chip demand and expanding technological advantages.

The Q1 2026 guidance is equally positive: revenue is expected to be between $34.6 billion and $35.8 billion, with gross margin projected to reach a new high of 63%-65%[2]. This guidance exceeds general market expectations, demonstrating the company’s full confidence in its own profitability.

CEO C.C. Wei emphasized on the earnings call:

[2]. As a core supplier of AI chip manufacturing, TSMC will directly benefit from continuous investment in global AI infrastructure construction. The company expects demand for AI-related chips to continue strong growth in 2026, driving advanced process capacity utilization to remain at a high level.

TSMC plans to invest $52-56 billion in capital expenditure in 2026, with

[2][3]. This investment scale not only demonstrates the company’s confidence in AI chip demand but will also consolidate its leadership in technological processes. The gradual release of new capacity will meet market demand while further improving gross margin through scale effects.

TSMC’s production bases in Taiwan expose it to significant geopolitical risks. Intensified Sino-US tech competition may affect the company’s ability to access certain customers or technologies. The company is diversifying risks by building advanced process fabs in Arizona, US, but the new fabs require time for capacity ramp-up and have high initial costs, which may exert certain pressure on short-term profitability.

TSMC’s revenue is denominated in NT dollars while a high proportion of its costs are denominated in US dollars, so foreign exchange volatility has a direct impact on the company’s gross margin. The relatively favorable foreign exchange environment in Q4 2025 drove the gross margin increase[1]. However, the 2026 exchange rate trend is uncertain, which may affect the company’s profit expectations.

Samsung and Intel are increasing their investment in advanced processes to narrow the technological gap with TSMC. If competitors make breakthrough progress, it may challenge TSMC’s pricing power and market share. However, based on current technological progress, TSMC’s leading position will remain solid in the foreseeable future.

From a technical analysis perspective, TSMC’s stock price shows a

[0]:

Indicator	Value	Signal Interpretation
Latest Closing Price	$346.23	-
20-Day Moving Average	$310.65	Short-term moving average above long-term moving average
50-Day Moving Average	$298.32	Clear upward trend
200-Day Moving Average	$245.90	Long-term upward trend
RSI (14)	79.02	Entered overbought territory
MACD	11.07	Momentum indicator is positive
Beta Coefficient	1.27	Higher than market volatility

: TSMC is in an upward trend, with a buy signal appearing on January 15, 2026[0]. Key resistance level is $351.33, next target level is $360.98; key support level is $326.59[0]. It should be noted that the RSI indicator shows the stock price has entered overbought territory, and may face adjustment pressure in the short term.

TSMC’s current market capitalization is approximately $1.79 trillion, with core valuation metrics based on TTM data as follows[0]:

Indicator	Value	Industry Comparison
Price-to-Earnings (P/E)	27.62x	Semiconductor industry average is approximately 20-25x
Price-to-Book (P/B)	8.77x	High among tech stocks
ROE	34.52%	Significantly higher than industry average
Net Profit Margin	43.70%	Leading level among global manufacturing industries

According to the latest data, analysts have assigned a

to TSMC, with an average target price of $377.50, representing approximately 9.2% upside potential from the current stock price[0]. 16 analysts (72.7%) have given a Buy rating, 6 (27.3%) have given a Hold rating, with the target price range of $330-$410[0]. Major institutions such as Needham, Barclays, and Bernstein have all maintained or reaffirmed their Buy ratings recently[0].

1. Solid Technological Leadership
   : 3nm process leads competitors by 1-2 generations, 2nm R&D progressing smoothly
2. Structural Growth in AI Demand
   : Global AI infrastructure construction drives sustained strong demand for advanced chips
3. Continuous Release of Scale Effects
   : Large-scale capital expenditure brings cost dilution effects
4. Positive Management Guidance
   : 2026 gross margin target of 63%-65%, revenue growth of 30%
5. Optimized Customer Structure
   : Stable orders from top tech firms, solid pricing power

1. Persistent geopolitical uncertainties
2. Foreign exchange volatility may affect short-term profit margins
3. Risk of technical correction amid overbought conditions

: Based on strong profit growth prospects, technological leadership, and structural growth in AI demand, TSMC has long-term investment value. In the short term, investors can watch for bargain-hunting opportunities at the $326.59 support level, with a medium-term target price of $360-$380[0].

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[0] Jinling AI - TSMC Company Profile, Technical Analysis and Market Data

[1] TSMC Investor Relations, “4Q25 Management Report” (https://investor.tsmc.com/english/encrypt/files/encrypt_file/reports/2026-01/4Q25 Management Report.pdf)

[2] Yahoo Finance, “TSMC Q4 FY2025 Earnings Call Transcript” (https://finance.yahoo.com/quote/TSMC.BA/earnings/TSMC.BA-Q4-2025-earnings_call-399056.html)

[3] Investing.com, “TSMC Q4 2025 Slides: Revenue Exceeds Guidance as Advanced Nodes Drive Growth” (https://za.investing.com/news/company-news/tsmc-q4-2025-slides-revenue-exceeds-guidance-as-advanced-nodes-drive-growth-93CH-4063636)