Keithen Drury, The Motley Fool

Sat, May 17, 2025, 3:45 AM5 min read

• Management has a great view of what future growth looks like.

• Taiwan Semi is building more chip capacity in the U.S.

• The stock trades right at its five-year average valuation mark.

• 10 stocks we like better than Taiwan Semiconductor Manufacturing ›

The market is a forward-looking machine, so knowing where a stock is heading is key to investing success. While price targets are always estimates, it's good to know your acceptable rate of return for an investment. That way, you'll know if your stock-picking process is working.

One stock that I'm extremely confident in is Taiwan Semiconductor (NYSE: TSM). I'm confident that this stock will not only beat the market over the next five years, it will crush it. But where did I get my estimate of a 129% gain in five years? It's fairly obvious when you listen to management speak.

Taiwan Semiconductor is the world's largest chip foundry. Its clients are among the biggest tech companies in the world, including Apple (NASDAQ: AAPL) and Nvidia (NASDAQ: NVDA). When you hear about companies like these two designing their own chip, they are designing it, but the manufacturing process is most likely farmed out to TSMC. This is a great relationship, as big tech companies don't need to maintain expensive facilities and employ thousands of workers whose only expertise is chip production.

In return, TSMC provides best-in-class technology and execution. Right now, TSMC can produce 3nm (nanometer) chips, which few other foundries can. It's also working toward 2nm chips slated to be launched later this year and 1.6nm chips for 2026. TSMC has cemented itself as a great partner by continuously innovating and offering cutting-edge technology.

Because chip orders are often placed years in advance, TSMC's management has unparalleled insight into the company's future. So, when it speaks, investors should listen. Over the next five years, management expects AI-related revenue to grow at a 45% compound annual growth rate (CAGR), with overall revenue nearing a 20% CAGR. That's strong growth, but what does that mean for the stock?

At the end of 2024, Taiwan Semiconductor produced $90.1 billion in revenue. If TSMC produced an 18% growth rate (near 20% as management has guided for), that figure would rise to $206 billion -- a 129% rise. That's well over a double in under five years. As long as TSMC can maintain its margins and isn't valued at an absurd starting valuation, assuming that its stock price will increase by a similar amount is not unreasonable.