An area where a ton of cash is being spent is the artificial intelligence field. AI hyperscalers seem to be bent on spending as much money as possible to build their computing capacity. Many companies are benefiting from this huge spending spree. is one of my favorites Taiwan Semiconductor Manufacturing Company(NYSE: TSM )which provides many of the chips used in AI computing units.
I think TSMC is one of the best investment options right now, and its stock could triple in the next five years if AI buildout projections are successful.
Image source: Getty Images.
If I were to ask you what the most important company on earth is, you might answer with one of the tech giants, eg Nvidia(NASDAQ: NVDA ) or Apple(NASDAQ: AAPL ). Although these are reasonable answers, keep in mind that these businesses only design the product; They don’t produce it. Both companies outsource their chip production to Taiwan Semiconductor, and these two products would not have been possible without the impressive capabilities developed by TSMC.
In the high-end chip world, there are really two other foundry options: Samsung and Intel. Intel has struggled to find customers for its foundry division due to its poor long-term performance, and Samsung often competes with its customers in non-foundry businesses, making it a less popular option. This leaves Taiwan Semiconductor in a class of its own, and is the reason why it is the largest semiconductor manufacturer by revenue.
Taiwan Semiconductor supplies most of the world’s high-end chips, and with large sums of money being spent on AI data centers, it is expected to benefit from the build. Nvidia believes that annual global data center capital spending will reach $3 trillion to $4 trillion by 2030—a quintupling at the low end compared to a projected 2025 value of $600 billion. AMD(NASDAQ: AMD )One of Nvidia’s main rivals, believes that its data center division can grow at a 60% compound annual growth rate (CAGR) until 2030. A 60% CAGR over five years implies almost 10x growth, which is almost unbelievable.
But if both companies are right about the big jump in AI spending, a lot more chips will be needed. And that will put Taiwan Semiconductor in a great position to thrive. It could easily triple in the next five years as it costs. It has grown nearly 260% in the past three years, more than tripling.
While Taiwan Semiconductor’s revenue has grown as the AI arms race has intensified, its free cash flow has been stagnant recently, though it has risen 70% over the past three years.
TSM revenue (quarterly YoY growth) data by YCharts
That’s because Taiwan Semiconductor has had to increase its production capacity, including a $160 billion investment in U.S.-based manufacturing facilities. These investments have already paid off big time for Taiwan Semiconductor, as they allow it to avoid import tariffs by bringing production to American soil.
Once Taiwan Semiconductor’s US facilities are operational and no longer require a large cash investment, Taiwan Semiconductor’s free cash flow should explode higher, allowing it to increase share buybacks or pay dividends. However it may choose to continue reinvesting in itself by increasing production capacity – a decision that has already yielded a huge return on investment.
If AI builds out at the pace that many savvy companies think, then Taiwan Semiconductor is a no-brainer buy. I think the stock could easily triple in the next three years, but if the AI market reaches Nvidia’s predicted levels, the returns could be even higher.
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Keithen Drury holds positions at Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has and recommends positions in Advanced Micro Devices, Apple, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. Motley Fool has a disclosure policy.
This cash-machine stock is set to triple in the next 5 years was originally published by The Motley Fool.
