Taiwan Semiconductor Manufacturing (TSM -6.68%) is the world’s leading semiconductor (chip) foundry. Its foundry business model means it makes chips tailored to its customers’ specific needs, and key partners include Nvidia, Apple, and Advanced Micro Devices.
The stock has been on a roll, up over 200% in the past five years, despite pulling back 25% year to date. And the next five years seem just as promising thanks to its role in the artificial intelligence (AI) pipeline.
To see how vital the company, also known as TSMC, is to AI development, it’s important to work backward, beginning with the end product: AI applications. For AI applications to be effective, they need to be trained using lots (and I do mean lots) of data. This data must be processed and managed in advanced data centers.
A key component of those data centers is the graphics processing unit (GPU), which has fueled Nvidia’s explosive rise to become the world’s third-most valuable company in just a few years. But while Nvidia designs the GPUs, TSMC produces them.
It’s important to note that no other company is making powerful AI chips at the scale and efficiency of TSMC. That’s why the company produces around 90% of the world’s advanced chips. The AI-related demand has paid off for TSMC, too. Last year, its high-performance computing segment (which includes AI chips) grew 58% year over year and made up 51% of its $90.1 in total revenue.
Over the next five years, management expects a mid-40% compound annual growth rate for AI accelerator revenue. Given this bullish outlook, the stock should be in for a good run over the next five years.
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