Semiconductors are the underrated champions of the tech world. They can be found in smartphones, computers, TVs, appliances, cars, and hundreds of other items that people interact with every day.
Many of the semiconductors used in these products come from Taiwanese semiconductor production (NYSE:TSM)the world’s largest chip foundry. It’s been a great five years for TSMC stock, with a 330% gain, and the next five years look just as promising. The reason is artificial intelligence (AI) and TSMC’s role in it.
The Basics of the AI Pipeline
The best way to understand why TSMC is so well positioned for the next five years is to work backwards, starting with the AI applications that many people have started working with in recent years.
AI applications such as OpenAI’s ChatGPT and The alphabet Gemini needs to be trained using massive amounts of data that are much larger than what can be stored in traditional ways, such as external hard drives or the cloud. As such, it needs to be kept in data centers.
These data centers also rely on graphics processing units (GPUs), therefore NvidiaThe world’s leading GPU manufacturer, has recently experienced explosive growth. And without TSMC’s manufacturing capabilities, these GPUs would be far less effective. If AI applications are the top of the pyramid, TSMC’s semiconductors are the base.
The Taiwan-based company predicts that AI-related sales will grow at a compound annual rate of 50% in the coming years, bringing the category to about 20% of TSMC’s revenue by 2028, a major boost for the company after slowing smartphone sales have weighed on its business recently.
Revenue growth doesn’t always mean stock price growth, but if management’s AI forecasts are correct, TSMC stock could rise significantly.
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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.
Forecast: Taiwan Semiconductor Manufacturing Will Surge Over the Next 5 Years. Here’s 1 Reason Why was originally published by The Motley Fool
