Making an exact prediction about how much a stock will rise over the next five years isn't easy. Additionally, there's a high chance I'll be wrong on my specific prediction, but I believe I'll be correct in the general direction.
I am fairly confident that Taiwan Semiconductor (TSM +2.83%) will rise over the next five years, but an exact prediction is 128%. A few factors led me to this conclusion, but if I'm right, TSMC is a no-brainer stock to buy right now.
NYSE: TSM
Key Data Points
TSMC's manufacturing is expanding in the U.S.
Taiwan Semiconductor is a leading contract chip manufacturer. It fabricates chips for its clients that don't have the ability to manufacture them themselves. This includes dominant tech players like Apple and Nvidia, although the list of TSMC clients is much larger. Taiwan Semi became the top partner for tech giants through continuous innovation and rock-solid execution, and is expected to stay in that role even as chip production starts to return to the U.S.
Taiwan Semiconductor announced plans totaling $100 billion to expand its U.S. manufacturing facilities with two packaging centers and one research and design operation. While some claim that this was because of pressure from President Donald Trump, both Taiwan's president and Taiwan Semiconductor's CEO say the moves are because the company's clients want chips produced in the U.S. TSMC's existing Arizona facility already sold out production through 2027, so it's clear its initial footprint in the U.S. wasn't enough.
One item on every investor's mind right now is tariffs. Currently, semiconductors are exempt from tariffs, but the administration is investigating semiconductors as a component that will eventually receive one. We'll see how that shakes out, but TSMC is already taking the steps necessary to expand into the U.S., which is Trump's ultimate goal. We're already seeing this play out, as Nvidia's new Blackwell GPU chips are being manufactured by TSMC in Arizona.
TSMC is clearly heading in a positive direction for U.S. investors, but what kind of growth does this mean for the stock?
TSMC stock looks primed for long-term gains
Because TSMC is a chip foundry, it has an excellent view into the trajectory of chip demand. As chip orders are often placed years in advance, investors should listen when Taiwan Semi's management makes predictions about where their business is headed over the next five years.
For its five-year guidance, Taiwan Semi's management team believes that its revenue will grow at a compounded annual growth rate (CAGR) approaching 20% over the next five years. If we arbitrarily assume that this CAGR will be 18%, that means Taiwan Semiconductor's revenue will rise by 128% over the next five years.
If Taiwan Semiconductor's margins stay the same and the stock is fairly valued at today's prices, then assuming that its revenue growth rate will translate to its stock price isn't a bad assumption.
Currently, Taiwan Semiconductor's stock trades for 22 times trailing earnings, which is below where it's traded over the past five years.
TSM PE Ratio data by YCharts
From a forward earnings perspective, TSMC's stock is also cheaper than the time frame for which we have available data. Additionally, the S&P 500 trades for 22.1 times trailing earnings and 20.2 times forward earnings, so Taiwan Semiconductor is trading at a slight discount to historical values and about what the broader market is trading at.
These seem like pretty fair values to me, which leads me to the conclusion that Taiwan Semiconductor's revenue growth, as long as it maintains its margins, will translate directly to stock price growth over the next five years.
This makes it obvious that TSMC is an excellent stock to buy right now, especially if you can ignore the short-term noise surrounding tariffs and focus on its long-term growth trajectory.
