Elon Musk Delivered Massive News for Taiwan Semiconductor Stock Investors

Elon Musk delivered some huge news for Taiwan Semiconductor stock investors as the CEO of SpaceX and Tesla and other companies noted that they might be working with Taiwan Semiconductor for the Terrafab manufacturing facilities which was a blow to Intel. There was initial suggestions that Intel would be the sole provider of the technology but now Taiwan Semiconductors in the discussion. So, let let me share with you the details and what it could mean for Taiwan's semiconductor stock investors. The video will focus on TSM rather than SpaceX or Tesla. >> I want to thank the Mly Fool for sponsoring this video. Visit full.com/parkev for the 10 best stocks to buy now. >> So, early on Saturday, October 3rd, Elon Musk confirmed the talks on X, saying that it's just discussions for now, but something may come of it, Musk posted. So in this article written by my colleague at the mly fool Daniel Sparks he noted as uh Tom's hardware describes two possible setups in this situation. In the one they think that it's more likely that TSMC would own and run a new factory with SpaceX and Terraab investing in that factory. So Taiwan Semiconductor would build and operate this factory and SpaceX and Tesla would own a piece of that factory and commit to buying a certain amount of the output from that factory. In another situation, SpaceX would own the majority stake while Taiwan Semiconductor provided the technology and the operating knowhow. So in this situation, TSMC would be a minority stakeholder and would provide the technology and the operations. In both cases, it's Taiwan Semiconductors skills, the knowhow, the proprietary knowledge. That is what SpaceX and Tesla is looking for. That's what Elon Musk is looking for. And I've been saying that Taiwan Semiconductor Manufacturing Company is the best manufacturing company in the world. period. If you're looking to manufacture semiconductors, which is right in the strike zone, the center of the strike zone of what Taiwan semiconductor does, it's the first company you're looking to. Now, the reason it was initially Intel that was in these discussions is because Intel is a US-based company, and there's more benefits if you're manufacturing in the United States to go with the US-based company. The current administration is very much encouraging that and Intel has a lot more available supply, available time, available resources. They're not sold out the way Taiwan Semiconductor is being the best company. You would understand they have more customers. Their customers want more of its time, more of its resources. And so working with Intel, it gives you more flexibility because they have more availability. They're willing to negotiate more on pricing on other terms because they're in a more desperate situation compared with TSMC that has more customers than it can serve. Already, Taiwan Semiconductor operates a very lucrative business with returns on invested capital at record highs at 34%. It's also multiple times the company's weighted average cost of capital. Their operating profit margins have also soared reaching 56% which is the best of most manufacturing companies uh except for of course Micron which is now reporting operating profit margins above 80%. But if you were to ask me over the next 15-year period, which company, which manufacturing company will generate the best operating profit margins, I would say Taiwan Semiconductor would do better than Micron in terms of operating profitability over the next longer term. In the near term, I suspect Micron will do better over the next 12 to 24month period, but over a longer term, I suspect Taiwan Semiconductor will do better. Taiwan Semiconductor is investing outside of Taiwan. They are investing in new manufacturing facilities in the United States and Japan and in Europe. So, this fits in with the management team's plans to diversify its business outside of Taiwan. They already invested $16 billion in the second quarter in US terms in capital expenditures, most of it to enhance their manufacturing capabilities. and they expect third quarter revenue to come in hot with 37% growth expected compared to the same quarter last year. Management has warned investors that their profit margins are likely to come down, but not anytime soon. They keep telling investors that longer term they expect their profit margins to come down, but every quarter they report margins that are better and increasing as I shared with you earlier with the longer term figures. And looking forward, they expect more of the same with operating profit margin forecasted at 57% in the upcoming quarter. And again, that would be better than their trailing 12-month average at 55.84. The reason management is forecasting lower profit margins is because of that geographic expansion. They told investors that they're not as profitable when they're manufacturing in the United States or in Japan or in Europe compared to when they're manufacturing in Taiwan for a lot of reasons, including the fact that manufacturing costs in those other regions are more expensive than manufacturing costs in Taiwan. Also, the government in Taiwan provides TSMC with a lot of benefits, a lot of incentives. It's one of the most, if not the most important corporation in Taiwan. So you can understand they get preferential government treatment. They are also getting incentives for expanding in the United States and in Japan and in Europe, but not as significantly as they're receiving in their home country. Still, in the near term, they keep generating better profit margins because their capacity utilization is so elevated. Right? I mentioned they're sold out of nearly all of their capacity and as soon as they bring in new capacity online, there's a customer waiting to purchase those services. Some of their biggest customers include Apple, Nvidia, and AMD. And if you're going to add SpaceX and Tesla to that incredible list, now you're reaching scale that's above normal capacity utilization rates for the company. And that leads to better profitability because you're maximizing your ut your capacity. You're utilizing all of your available supply and that lowers your cost per unit of production which leads to higher profit margins. Fortunately, I informed investors what an attractive opportunity this stock is for all of 2026 and the stock price has soared. It's trading at near its most expensive valuation on a forward price to earnings basis of 22. But I still think that's an attractive value to investors because the business has improved so significantly in this time. Similarly, if I look at the valuation on a discounted cash flow basis at $484 per share, I think it's undervalued because I calculated a fair value at 670. And I haven't even included any of the upside from this announcement where Taiwan Semiconductor could capture a share of this big opportunity. So, great news for TSM stock investors and I will be reiterating my buy ranking of this excellent semiconductor stock today. Hey everyone. So many of you have been asking about my investing strategy, and I'm excited to announce that I've written a book that's available for sale now that describes my six-step invest in investing framework for evaluating stocks. I've added the link in the description below.