2 Monster Stocks to Hold for the Next 5 Years

One of the best ways to make money in the stock market is by buying and holding solid companies for the long run, as this strategy not only allows investors to take advantage of secular or disruptive trends, but also helps them benefit from the power of compounding.

For instance, an investment of $1,000 in shares of Amazon and Netflix five years ago has increased by 2.3x and 2.8x. These companies have helped investors take advantage of growth trends such as cloud computing, e-commerce, and video streaming. That's the reason why buying and holding on to top artificial intelligence (AI) stocks for the next five years could turn out to be a smart move, thanks to the rapid growth of this technology.

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Here's a closer look at two names in AI that are among the dominant forces in their industries and could deliver outstanding gains to investors over the next five years.

1. Palantir Technologies

Palantir Technologies (NASDAQ: PLTR) is one of the hottest names in the AI software market, as its Artificial Intelligence Platform (AIP) is turning out to be a major success. AIP is a software platform, using which customers can build and deploy AI applications specific to their businesses with the help of large language models (LLMs) in real time.

According to Palantir, customers using AIP have witnessed significant improvements in their operations. For instance, Palantir's AIP allowed an insurance company to automate the process of underwriting, thereby "reducing the typical underwriting response time from over two weeks to three hours," according to remarks made on the company's third-quarter earnings call. Meanwhile, rail transportation products and services provider TrinityRail witnessed a $30 million improvement in its bottom line in just three months following the deployment of AIP.

And customers who have already deployed Palantir's AIP are expanding the adoption of this software platform. The company pointed out in its November 2024 earnings conference call:

A large American equipment rental company expanded its work with us less than eight months after converting to an enterprise agreement, increasing the account ARR twelvefold; a bottled water manufacturer, a specialty pharmaceutical company, and an agricultural software provider all signed seven-figure ACV deals less than two months after their initial boot camps.

These deals are leading to terrific growth in Palantir's transaction sizes, customer count, and revenue pipeline. This was evident in Palantir's latest quarterly report.

Palantir stock shot up 22% in extended trading following the release of its fourth-quarter 2024 results on Feb. 4. The company's top and bottom lines exceeded expectations, with its revenue growing 36% year over year. Its earnings grew at a faster pace of 75% thanks to robust unit economics, driven by its land-and-expand strategy.

For example, Palantir closed 129 deals worth $1 million or more last quarter, an increase of 25% from the prior year. There was an increase in the number of $10 million deals as well to 32 from 21 in the year-ago period. This improved spending explains why Palantir's adjusted operating margin increased by 11 percentage points year over year to 45% last quarter.

Looking ahead, the size of the AI software platforms market is expected to jump by almost 5.5x between 2023 and 2028, according to IDC. That would translate into an incredible annual growth rate of more than 40%. The good part is that Palantir's commercial revenue is now growing at a faster pace than the end market, suggesting that the company is gaining more ground in this lucrative space.

Of course, the valuation remains a stretch, as Palantir is trading at a really expensive 80 times sales and 175 times forward earnings. Investors, however, should note that it may be able to justify that expensive valuation by cornering a bigger share of the AI software platforms market, as it is considered to be one of the leading solution providers in this space, with solid unit economics that should translate into healthy long-term earnings growth.

2. Taiwan Semiconductor Manufacturing

Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, is the world's largest semiconductor foundry and manufactures chips for fabless semiconductor companies such as Nvidia, AMD, and Qualcomm, along with consumer electronics companies like Sony and Apple. It controlled an estimated 65% of the global foundry market last year, which was way higher than the second-place Samsung's share of just 9.3%.

TSMC, therefore, is in a terrific position to capitalize on the secular growth of the semiconductor market for the next five years. Third-party estimates are forecasting the semiconductor industry to generate nearly $1.5 trillion in revenue in 2030, nearly double its size in 2022. AI is set to play a crucial role in driving this market's growth over the long run, as the market for AI chips is forecast to increase at almost 38% a year through the end of the decade.

Not surprisingly, TSMC is forecasting its revenue to increase at a compound annual growth rate of 20% for the next five years. Based on the company's 2024 revenue of $90 billion, TSMC's top line could hit $224 billion after five years. That could translate into terrific upside on the stock market, based on its five-year average price-to-sales ratio of 9, which points toward a market cap of just over $2 billion. That would be nearly double its current market cap.

We have already seen that TSMC is the dominant player in the semiconductor foundry market. This explains why the company is in a position to charge a premium for its services and raise prices. What's worth noting is that TSMC is already putting its pricing power to use. The company's largest customer, Apple, is reportedly paying three times more money to TSMC for its chips as compared to what it was a decade ago.

That's not surprising, as TSMC is now manufacturing chips using more advanced nodes, providing more processing power and reducing power consumption at the same time. As such, there is a good chance that TSMC's earnings growth will be stronger than its revenue growth over the next five years. Analysts have raised their earnings expectations from TSMC for the next three years.

TSM EPS Estimates for Current Fiscal Year data by YCharts

However, this discussion suggests that its bottom line could grow at a faster pace than analysts' expectations. That's why it would be a smart move to buy and hold TSMC stock for the long run, considering that it is trading at a fairly attractive 24 times forward earnings right now, which is lower than the tech-laden Nasdaq-100 index's forward earnings multiple of 27.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Apple, Netflix, Nvidia, Palantir Technologies, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.