TSMC's 2nm Node: Will It Power the Next Growth Cycle or Pressure Margins?

Taiwan Semiconductor Manufacturing Company TSM, also known as TSMC, is expanding into 2nm nodes as the world moves toward more efficient, miniaturized AI chips. In its recent earnings call, TSM announced that it is expanding its 2nm fab in Hsinchu and Kaohsiung Science Parks in multiple phases.

TSM’s Arizona chip manufacturing facility is also dedicated to 2nm and advanced technology. As the company moves toward expanding its 2nm production facilities for the new generation chips, its initial production costs are high, yields are lower and hence the gross margin has temporarily dropped.

However, as it scales fast in this direction, it will gain economies of scale, significant energy efficiency and performance, extending TSMC’s technology lead. This makes this temporary margin dilution unavoidable for sustained long-term growth. As demand for 2nm chips grows for AI and high-performance computing, TSMC is set to gain in the long run.

For now, Taiwan Semiconductor is estimating a near-term margin dilution of around 2%, which could further expand to 3-4% until production scales. The company is betting that scale, automation and government incentives will eventually close the cost gap. It believes that the investment will pay off as global customers seek reliable, regionally diversified suppliers for advanced nodes like 2nm and A16.

How Competitors Fare Against TSM

Intel INTC and GlobalFoundries GFS 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 it better compete with Taiwan Semiconductor’s upcoming N2 chips.

GlobalFoundries focuses more on mature nodes. However, 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 risen around 54.5% year to date compared with the Zacks Computer and Technology sector’s gain of 30.9%.

From a valuation standpoint, TSM trades at a forward price-to-earnings ratio of 25.57, lower than the sector’s average of 30.75.

The Zacks Consensus Estimate for Taiwan Semiconductor’s 2025 and 2026 earnings implies a year-over-year increase of 44.9% and 20.4%, respectively. Estimates for 2025 and 2026 have been revised upward in the past 30 days.

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.

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This article originally published on Zacks Investment Research (zacks.com).

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