Artificial intelligence (AI) has propelled stocks to monster gains over the last two years, starting with the launch of OpenAI's ChatGPT. By now, investors are well aware of breakout stories like Nvidia and Palantir that have been early to capitalize on the boom, but there are likely to be plenty of other winners from the new technology.
Some CEOs think AI could be as big as the internet, and big tech companies are already spending billions on this evolving technology in order to take leadership of what is expected to be the next major computing platform.
However, there are still other opportunities to capitalize on the growth in AI. Let's take a look at two of them.
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1. TSMC
Taiwan Semiconductor Manufacturing (TSM -0.70%) hasn't gotten as much attention as chip stocks like Nvidia, but TSMC, as the company is also known, could be the most important company in the AI revolution. TSMC is the company that Nvidia and other fabless chipmakers like Advanced Micro Devices, Broadcom, and Qualcomm as well as big tech companies like Apple, Amazon, and Alphabet turn to for their chip production needs.
In other words, it's a linchpin in the supply chain for both the semiconductor industry and artificial intelligence as so many companies depend on it to manufacture their products.
TSMC has already begun to capitalize on the AI-driven demand as revenue in its most recently reported quarter jumped 39% year over year to $23.5 billion, and TSMC also generates impressive margins with an operating margin of 47.6% in the third quarter, showing its wide economic moat in the industry.
The company looks poised to capitalize on continuing demand for AI chips since it handles roughly 90% of third-party manufacturing of advanced chips and works closely with companies like Nvidia on production. TSMC itself touts its "leading-edge logic, memory, and packaging technologies," and its chips go into a wide range of devices, including servers in the data center and edge devices like smartphones and appliances.
While there's still some uncertainty in the AI boom, demand is likely to grow over the next several years. TSMC seems better positioned to capitalize on it than other AI stocks on the market. The stock has nearly doubled in 2024 but has more room to run as it trades at a reasonable price-to-earnings ratio of just 33.
2. Upstart
Upstart (UPST -5.62%) is still well below its peak during the pandemic, meaning the stock has largely been forgotten even as it's started to rally again this year.
Upstart uses proprietary AI technology to determine creditworthiness to originate consumer loans, and it claims that its technology is significantly better than traditional FICO scores. The company has also seen a recovery in its business, which it attributes to improvements in its model. Management noted that Model 18, its latest update, drove large conversion improvements in the third quarter, meaning more applicants ended up receiving loans.
Upstart's business model is also a reminder that there are opportunities in AI beyond just generative AI. Beyond its own competitive advantage in loan originations, Upstart has significant upside potential because interest rates should eventually come down, encouraging more borrowing, potentially lifting the business to its earlier peak as demand for loans surged during the pandemic.
While the company is sensitive to the macroeconomic environment, AI remains the key to unlocking the potential of the business as disrupting the broader loan ecosystem and serving as the de facto creditworthiness measurement would generate huge returns for Upstart, which is valued at just $6.5 billion.
The business has returned to growth with revenue up 20% to $162 million in the third quarter, though Upstart is not currently profitable. However, there's a lot of potential for margins to scale up as the business grows.
