Why TSMC Is the 1 Stock I Would Buy and Hold for the Next 5 Years

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In this segment from “The Five” recorded on Dec. 14, Motley Fool contributors Connor Allen and Trevor Jennewine discuss the merits of one of Connor’s top stock picks. 

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Trevor Jennewine: Like I just mentioned, analysts are forecasting at least two rate hikes next year, maybe three. Because higher interest rates tend to slow economic growth, it makes it more expensive, the cost of capital goes up, so it’s more expensive to take out those loans. That tends to hurt quickly growing businesses. As a result, a lot of growth stocks tend to struggle in high-interest rate environments. With that in mind, if you had to pick one stock to buy and hold over the next five years, which stock would you choose and why? Connor, let’s go with you.

Connor Allen: Like I said earlier, I invest in a lot of growth stocks that are going to struggle in inflationary environment, and I’m OK with that. I know market shifts happen, and this is what I would consider a white swan even. People talk about black swan events where it’s just an unforeseen thing that happens in the future. Take for example 9/11 and the market reaction to that or COVID and the market reaction to that. Those are black swan events. This is just rate hikes, and you know they’re coming. They talk about them coming. Obviously, it’s going to hurt your companies or potentially it could hurt your companies, but you know that that’s coming. If I were to invest in one company for the next five years, with all of this in mind, I would probably pick Taiwan Semiconductor Manufacturing (NYSE:TSM), ticker symbol is TSM, and TSMC, that’s Taiwan Semiconductor Manufacturing Company, has what I believe to be one of the largest moats in the market right now. I just want to pull up this slide. That’s not it. Can you see it? Yeah. Great. TSMC is the largest chip manufacturer in the world. Basically, every electronic thing that you touch, whether you’re talking about changing your thermostat up or down, you’re talking about your iPhone, your laptop that you’re using, everything has been touched by TSM in some form or way because there are so many semiconductor chips and everything that we’re using every single day that’s electronic. Some of their largest customers include NVIDIA (NASDAQ: NVDA)AMD (NASDAQ: AMD), and Apple (NASDAQ: AAPL), and they have over 500 employees and 10,000 different chips that they’re making.

They have a lot of variety, and they also have a ton of pricing power because they are pretty much the only one that has the infrastructure to build out a lot of these chips. When you talk about Apple’s M1 chip, nobody else can make those except TSM. TSM is the one actually doing the manufacturing; NVIDIA, AMD, and Apple are handing the designs to TSM and saying, “Hey, make these.” TSM has a team of amazing engineers. All that goes into its mobile a little bit, but they also have a moat in that if Apple were to try to build out a manufacturing infrastructure in order to create its own chips, they would have to spend between $20-$30 billion to build that out. It’s obviously just a huge cost for businesses to try and do this and then to maintain it as well is also another cost that they might not want to do. It seems like most companies are, no company besides Intel really, and Intel is actually thinking about moving away from creating chips and just doing manufacturing similar to what TSM is doing because it is so hard to design and manufacture chips both.

Obviously, another moat is that you need great engineers. Taiwan is full of a lot of engineers. TSMC has amazing engineers over there, and a lot of them have been working for years on end. They also have 56 percent market share in global chip manufacturing. They have a ton of pricing power like I talked about earlier. I think they just had a price hike, I can’t remember. I think it was between 10-20 percent hike in prices that they passed on to their clients. Nobody’s going away from TSM. They’re not leaving because their customers love them. That’s the company that I would invest in just because if I were to invest in one, I’d want to be safe. I wanted to have a big moat and also wanted to have some pricing power in this environment that we’re in right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.