Potential Chip Stock Investment: A Decade's Worth of Profitability Prospects Awaits
Picking top investments for the decade isn't a walk in the park, with trends coming and going, causing some stocks to falter. However, one industry that's undeniably here to stay is the chip industry. While I admit that artificial intelligence (AI) will dominate the tech world, predicting the ultimate AI giant a decade from now is a challenging task. What's certain, though, is that the firms providing the machinery to process and manage these AI models will thrive.
After careful consideration, my preferred choice in this field is Taiwan Semiconductor (TSM -1.22%). I believe this company is perfectly positioned to be an investment star of the decade, backed by management's convincing growth forecasts.
Taiwan Semiconductor's Management Anticipates Rapid Growth Over the Next Five Years
Taiwan Semiconductor is a contract chip manufacturer, which means companies design their chips and then outsource production to it. This transition in the chip industry has been crucial as some of the technology world's leaders, such as Advanced Micro Devices, Nvidia, and Apple, now rely on this service.
Also, a surprising number of other companies are now designing their own chips, rather than relying on TSMC to manufacture them. As Taiwan Semi remains neutral in this field, it doesn't matter who succeeds in the AI race. Regardless of who emerges as the ultimate winner, the chances are high that those companies will utilize Taiwan Semi's technology in their own products.
This trend has led to impressive growth lately, as AI-related revenue for TSMC tripled within the past year. But despite this strong performance, management expects AI-related revenue to grow double again in 2025. That's staggering growth that every investor desires to be part of. For the next five years, management projects that AI-related revenue will display a compound annual growth rate (CAGR) of around 45 percent – an expansion that is far from reaching its peak.
However, AI-related revenue only contributes to approximately mid-teen percent of TSMC's total revenue. Over the next five years, management believes that its revenue growth can surge to a CAGR of 20 percent in U.S. dollars. For a company of TSMC's size, such growth is remarkable and has the potential to propel it among the top performers of the decade.
But what kind of returns should investors expect?
The Stock is Priced At a Modest Level
Despite management's optimistic outlook for revenue growth, fueled by AI proliferation, TSMC's stock trades for a fairly reasonable price tag.
At 23.5 times forward earnings, TSMC is priced the same as the broader market, represented by the S&P 500, which trades at 23.4 times forward earnings. Given that the broader market isn't predicted to increase its revenue by 20 percent, Taiwan Semi is undeniably a value buy at these levels with room for further growth.
Throughout the next decade, the chip market will undoubtedly witness fluctuations, but the overall trend is upwards. Our ever-growing reliance on computing will only benefit companies like Taiwan Semi.
Taiwan Semi is undoubtedly one of the best stocks to invest in and hold for the decade, with those who buy now likely to be extremely grateful a few years down the line.
The strong growth expectations for Taiwan Semiconductor's AI-related revenue, projected to triple by 2025 and display a compound annual growth rate (CAGR) of around 45% for the next five years, make it an attractive investment opportunity. Furthermore, despite being priced at a reasonable level compared to the S&P 500, TSMC's stock holds potential for further growth due to its position in the rapidly expanding chip market.
