Prediction: Taiwan Semiconductor Stock Could Surge by 129% in the Next 5 Years

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.

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Taiwan Semiconductor is a valuable partner for many companies

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?

Taiwan Semi's stock rise will be tied to business performance

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.

Because Taiwan Semi is a sole source supplier for many of these companies, it's unlikely that it will need to compress its margins over the next few years. However, tariffs could shake up this assumption if its customers are unwilling to absorb some of the costs. One thing to note is that semiconductors are currently exempt from "reciprocal" tariffs, although U.S. President Donald Trump has stated that this arrangement will be revisited. Taiwan Semi has already gotten ahead of this threat, announcing a $100 billion investment to increase manufacturing capabilities in the U.S.

While some say this $100 billion investment equals being strong-armed by Trump, both TSMC's CEO and Taiwan's president have denied this, pointing to the fact that TSMC's existing Arizona production facility has sold out capacity through 2027. Regardless, Trump's getting what he wanted by moving more production stateside.

Furthermore, the $100 billion investment won't affect Taiwan's income statement. That expense is only recognized through depreciation in subsequent years. One area that might take a hit is its operating expenses, as TSMC will have to hire staff before actual chip production, which will decrease its margins. However, that factor will eventually disappear once the production facilities are up and running.

As a result, TSMC's profit margin may dip within the five-year timeframe, but it should return to its current levels by the end.

Moving to valuation, Taiwan Semi's stock trades at almost exactly its five-year average price-to-earnings (P/E) level.

TSM PE Ratio data by YCharts.

This gives me confidence that TSMC's stock isn't overpriced at these levels, and that any future growth will not be due to earnings expansion.

Taiwan Semiconductor is in an excellent position to capitalize on the AI boom and many other technological trends. Management has a great view of the future of chip demand, which leads me to believe that Taiwan Semiconductor's stock can more than double over the next five years.

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Keithen Drury has positions in Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.