Prediction: Taiwan’s semiconductor manufacturing will boom over the next five years. Here’s why:

Semiconductors are an underappreciated workhorse in the technology world: They’re found in smartphones, computers, televisions, home appliances, cars, and hundreds of other products people use every day.

Many of the semiconductors used in these products are manufactured by Taiwan Semiconductor Manufacturing Corporation. (TSM 0.33%)the world’s largest chip foundry. TSMC’s stock has risen 330% over the past five years, and the next five looks just as promising. The reason is artificial intelligence (AI) and TSMC’s role in it.

The foundation of an AI pipeline

The best way to understand why TSMC is so well positioned over the next five years is to work backwards from the AI ​​applications that many people have started to engage with over the past few years.

AI applications such as OpenAI’s ChatGPT and Alphabet’s Gemini need to be trained using vast amounts of data, far more than can be stored in traditional ways such as on an external hard drive or in the cloud, and therefore that data needs to be stored in data centers.

These data centers also rely on graphics processing units (GPUs), which is why Nvidia, the world’s leading GPU manufacturer, has seen explosive growth recently. And without TSMC’s manufacturing capabilities, those GPUs would be much less efficient. If AI applications are the top of the pyramid, TSMC’s semiconductors are its foundation.

The Taiwan-based company expects AI-related sales to grow at a 50% annual rate over the next few years, which would bring AI-related revenue to about 20% of TSMC’s revenue by 2028, a big boost for the company after recent slowdown in smartphone sales weighed on its business.

Data by YCharts.

While revenue growth doesn’t necessarily translate into stock price growth, TSMC’s stock could soar if management’s AI forecasts turn out to be accurate.