Finding stocks that are among the top investments of the decade isn't easy. Many trends can rise and fall, causing some stocks to falter after a few years. However, one industry with obvious staying power that will benefit no matter how big other trends get is chip companies.
While I believe artificial intelligence (AI) will become a huge factor, it's hard to identify which company will be the biggest winner a decade from now. However, the chip companies that supply the tools needed to process and run these models will undoubtedly succeed.
My top pick in this space is Taiwan Semiconductor (TSM -1.22%). I think it's primed to be one of the best investments of the decade, as management has strong projections about the business's growth trajectory.
Taiwan Semiconductor's management projects strong growth over the next five years
Taiwan Semiconductor is a contract chip manufacturer, which means companies can design their own chips and then outsource the production to it. This has been a key shift in the chip industry, as some of the most cutting-edge companies have chosen this route rather than using a chip that another company designed.
Advanced Micro Devices, Nvidia, and Apple are among the clients that use this service. Those companies are heavy hitters in the high-tech world, but many more companies are designing their own chips, rather than having TSMC produce them.
Because Taiwan Semi is neutral in this field, it doesn't matter who the winner is in the AI race, since it's likely using technology with Taiwan Semi chips in it. This led to phenomenal growth lately, as AI-related revenue for TSMC tripled over the past year. However, even after that strong year, management projects that AI-related revenue will double again in 2025. That's phenomenal growth that every investor wants to capitalize on. For the next five years, management projects that AI-related revenue will have a compounded annual growth rate (CAGR) in the mid-40% range, so this segment is far from done growing.
However, that's only a part of TSMC's business, as it only makes up around a mid-teens total of revenue. Over the next five years, TSMC's management believes its revenue growth can reach 20% CAGR in U.S. dollars. For a company of TSMC's size, that's incredible growth that will easily allow it to become one of the top-performing stocks of the decade -- if it achieves those projected levels.
But what kind of returns should investors expect?
The stock isn't all that expensive
Even though management has projected strong growth in an industry that's clearly expected to benefit from AI proliferation, TSMC's stock trades for a fairly cheap price tag.
TSM PE Ratio data by YCharts.
At 23.5 times forward earnings, TSMC is priced the same as the broader market, measured by the S&P 500, which trades at 23.4 times forward earnings. The broader market isn't expected to grow revenue by 20%, so Taiwan Semi is clearly a cheap stock at these levels and has plenty more room to soar.
Over the next decade, the chip market will undoubtedly experience downturns, but the overall trajectory is up and to the right. The amount of computing we're using is rapidly increasing, and TSMC stands to be one of the benefactors of this shift.
Taiwan Semi is one of the best stocks to buy and hold for the next decade, and anyone who takes a position now will be glad they did years down the road.
