TSMC Demonstrates Margin Strength in Q3, But Overseas Expansion Risks Unchanged

What happened

TSMC reported Q3 gross margin gains and an upbeat Q4 outlook, highlighting its ability to manage higher costs from global fab expansion in the US, Japan, and Germany. This aligns with its dominant advanced-node position and strong AI/HPC tailwinds, driving ~30% revenue growth in 2025 as noted in the DeepValue report. However, the stock has risen ~51% over 12 months to ~26x P/E, embedding much of the AI scarcity premium and leaving limited near-term upside. Persistent risks include semiconductor cyclicality, high capex for overseas fabs with uncertain returns, and Taiwan-centric geopolitical tensions that could disrupt operations. Thus, while operational efficiency is evident, the investment case remains clouded by valuation and unresolved structural challenges.

Implication

The margin gains signal TSMC's near-term capacity to absorb overseas fab costs, potentially supporting earnings stability amidst expansion. However, sustaining these margins requires flawless execution on the N2 node ramp and CoWoS capacity expansions, with any missteps risking competitive erosion. With the stock trading at elevated multiples, further upside may be limited unless AI/HPC demand exceeds current optimistic projections. Critical monitoring is needed for overseas fab economics, as higher costs could erode long-term ROIC despite subsidies. Therefore, investors are advised to wait for clearer evidence of cost control and geopolitical stability before increasing exposure, aligning with the 'WAIT' recommendation.

Thesis delta

The news confirms TSMC's operational prowess in managing overseas expansion costs, reinforcing its near-term growth narrative. However, it does not address the core thesis risks of valuation overhang, semiconductor cyclicality, and geopolitical vulnerabilities, which remain fully intact. Consequently, no shift in the 'WAIT' recommendation is warranted, emphasizing continued patience for a more attractive risk-reward balance.