While taking everything a management team says at face value can be an investing error, checking its historical predictions against actual results is a good way to start trusting what management says. Of course, this isn't possible with new management teams, but those that have been in place for some time are easier to trust.
One management team that has been in place for a while and has a tremendous track record for hitting or exceeding expectations is Taiwan Semiconductor Manufacturing (TSM +6.30%). CEO C.C. Wei has been in the role since 2018 and is one of the industry's best. He just made an incredible prediction about his company's trajectory, and investors need to pay attention to what he says.
Taiwan Semiconductor sees massive growth on the horizon
Taiwan Semiconductor is the top contract chip manufacturer and has a phenomenal track record of innovation. Companies partner with TSMC (as it often known) to design their chips and outsource the production to the company. This includes giants like Nvidia, AMD, and Apple, which makes it a great way to invest in technology without needing to pick a winner in a particular competition.
This also puts Taiwan Semiconductor in a great place to have a pulse on the chip industry, as it knows what orders are coming years in advance. This is where an incredible projection from Wei came from and could mean huge returns for investors.
NYSE: TSM
Key Data Points
Thanks to the strength in the chip market coming from artificial intelligence (AI), smartphones, the Internet of Things, and the automotive sector, Wei projects Taiwan Semiconductor's revenue will approach a 20% compound annual growth rate (CAGR) over the next five years. For a company Taiwan Semiconductor's size, that's massive growth. However, there are a few things investors should be aware of regarding this projection.
First, it does not mean its revenue will grow by 20% each year. This calculation uses the initial and final revenue value, so revenue growth could be negative in any given year, and this protection could still be true. Using a CAGR keeps investors in the long-term mindset, as the start and end values are what matter most. This is incredibly important in the chip industry, as it is known to have up years and down years.
Second, not all sectors are created equally. For example, AI-related revenue is expected to have a CAGR of 45% during this same five-year period. This will make up for some of the slower-growing industries and will grow to become a larger part of Taiwan Semi's business. Right now, AI-related revenue accounts for a mid-teens amount of its total, but this share will surely rise over the next five years.
Lastly, this projection includes assumptions from new technologies that are being developed. Right now, the current top chip from TSMC is of the 3 nanometer (nm) variety, but it has plans in place to launch a 2nm chip (starting production in late 2025) and a 1.6nm chip (starting production in late 2026). Any delays or issues with these chips could significantly affect the 20% CAGR forecast, but Taiwan Semiconductor's track record of launching new products on time speaks for itself.
TSMC is still a fairly valued stock
There are a lot of strong tailwinds powering TSMC, but what does it mean for the stock price? Although these are great projections, they mean nothing if they are already baked into TSMC's stock price. However, I don't believe that to be the case. Taiwan Semiconductor's stock isn't all that expensive, trading at 21 times forward earnings.
TSM PE Ratio (Forward) data by YCharts
That's cheaper than where many other big tech companies trade. Considering that TSMC is projected to post a 20% CAGR over the next five years, it will also exceed the growth rates of most of its peers.
With TSMC's stock price at a reasonable level, it's not unrealistic to expect stock returns right around that 20% CAGR as well. Considering the long-term growth rate of the S&P 500 is about 10%, this represents a massive investment opportunity. As a result, TSMC is a top stock pick in the market and would be near the top of my list of stocks to own if I could only own one.
