Semiconductors are the underappreciated champions of the tech world. They're found in smartphones, computers, TVs, appliances, cars, and hundreds of other items people interact with daily.
Many of the semiconductors used in these products come from Taiwan Semiconductor Manufacturing (NYSE: TSM), the largest chip foundry in the world. It's been a great five years for TSMC stock with its 330% gain, and the next five years look just as promising. The reason is artificial intelligence (AI) and TSMC's role in it.
The foundation of the AI pipeline
The best way to understand why TSMC is so well-positioned for the next five years is to work backward, starting with the AI applications many people have begun interacting with over the past few years.
AI applications like OpenAI's ChatGPT and Alphabet's Gemini must be trained using massive amounts of data that far exceed what can be stored in traditional ways, such as external hard drives or the cloud. As such, it must be kept in data centers.
These data centers also rely on graphics processing units (GPUs), which is why Nvidia, the world's leading GPU manufacturer, has seen explosive growth recently. And without TSMC's manufacturing capabilities, these GPUs would be much less effective. If AI applications are the top of the pyramid, TSMC's semiconductors are the foundation.
The Taiwan-based company projects that AI-related sales will increase at a 50% compound annual rate over the next several years. That would bring the category to around 20% of TSMC's revenue by 2028, a huge boost for the company after slowing smartphone sales have weighed on its business recently.
Revenue growth doesn't always translate to share price growth, but if management's AI projections prove accurate, TSMC stock has the potential to soar.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Prediction: Taiwan Semiconductor Manufacturing Will Soar Over the Next 5 Years. Here's 1 Reason Why. was originally published by The Motley Fool