Beyond the "Magnificent Seven": My Top 2 Stocks to Become the Next Market Leaders

Globe and Mail

2 days ago

Key Points
Taiwan Semiconductor and Visa could reach the size of the "Magnificent Seven" stocks.
Visa's consistent growth can boost its earnings significantly higher in 10 years.
Taiwan Semiconductor Manufacturing is a key beneficiary of the AI race.
10 stocks we like better than Taiwan Semiconductor Manufacturing ›
We all know about the "Magnificent Seven" stocks. These companies have generated huge gains for shareholders and now combine to have a market cap of around $15 trillion. It has been incredible to watch these technology giants take over the business world.
But what about the next Magnificent Seven stocks? Here are my two top choices for stocks that will become market leaders over the next decade due to the sustained tailwinds that will drive underlying profit growth. In fact, one of these stocks already has a market cap of over $1 trillion, but I think it can get much larger over the next 10 years.
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Visa's steady gains
The most prolific payments company in the world is Visa (NYSE: V). Last year, it processed $13.2 trillion in digital payments in 160 different currencies through 233.8 billion transactions. That is all in just one calendar year. There are now 4.8 billion Visa debit and credit cards in circulation, almost one for every person on earth.
Immense scale gives Visa a competitive advantage via a network effect, which makes it almost impossible for upstarts to compete. Multiple tailwinds help Visa's revenue grow. First, it grows along with incomes, consumer spending, and business transactions around the globe. Second, it grows with the adoption of digital payments over physical cash.
Third, it is boosted by inflation as the company earns a small fee for every dollar spent through its network -- so if items cost more, that is more revenue paid to Visa. These factors and Visa's competitive moat are why Visa's revenue is up 171% cumulatively in the past 10 years.
These tailwinds should continue over the next 10 years. However, Visa is now looking for more ways to drive growth through what it calls valued-added services such as security, fraud protection, and analytics for merchant and banking partners. This segment grew revenue 22% year over year last quarter and can keep uplifting overall revenue growth.
Visa has high profit margins of 66%. This is due to its asset-light business model and wide competitive advantage. Over the next 10 years, I expect Visa's profit margin to keep climbing higher as it gets more scale over its fixed cost base. When combined with the sustained economic tailwinds, I think the company's $25 billion in operating income can more than double 10 years from now to between $50 billion and $100 billion.
This would put it in the same category of the Magnificent Seven stocks and will help Visa keep growing its market cap and stock returns for shareholders.
V Operating Income (TTM) data by YCharts
Taiwan Semiconductor's massive tailwinds
Visa is a steady compounder, but some may say a boring business. If you look at its revenue chart, it basically goes up in a straight line. The same cannot be said of Taiwan Semiconductor Manufacturing (NYSE: TSM) -- otherwise known as TSMC -- and its explosive revenue potential in the next 10 years.
TSMC is the premier manufacturer of advanced semiconductors in the world. Due to a large level of reinvestment in technological advances and its model of taking outsourced orders from computer chip designers as opposed to the traditional model of building and selling chips yourself, TSMC has expanded its lead and is now crowding out the field with its ability to produce cutting-edge computer chips at scale.
These computer chips are vital for artificial intelligence (AI), which is leading TSMC customers such as Nvidia, Advanced Micro Devices, and Alphabet to greatly increase their orders. As usage of AI continues, TSMC's revenue should grow as well.
We're still in the very early days of AI, giving TSMC at least 10 more years of growth ahead for this market segment. Over the past 10 years, the company's revenue has grown by 250% to $97 billion. I expect revenue to more than double over the next 10 years due to AI, growing to around $250 billion. Using TSMC's best-in-class profit margins for a manufacturer of around 45%, $250 billion in revenue could turn into over $100 billion in annual earnings 10 years from now. That would put it in the same class as the technology giants today.
Today, TSMC has a market capitalization of $1.2 trillion. If it gets its yearly operating earnings above $100 billion, I expect investors to value it significantly higher, making it a great buy for your portfolio today.
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