Prediction Markets Are Here to Stay, but This Stock Is a Better Way to Play the Trend

Prediction markets are all the rage right now. A few months ago, you couldn't use YouTube without seeing a Kalshi ad on every other video and, before that, Polymarket had become a tool people were using to project the winner of the 2024 presidential election.

Meanwhile, DraftKings might have begun as a sports betting application, but it has since ventured into prediction markets, allowing users to wager on yes/no contracts on everything from the Oscars to presidential elections. Even stockbrokers like Robinhood and Interactive Brokers have gotten in on the action. That tells me the trend is likely not going anywhere.

People are even beginning to use agentic artificial intelligence to interact with prediction markets, essentially acting as a digital bookie.

However, both Kalshi and Polymarket, the most known prediction market companies, are still private. And most publicly traded agentic AI companies are focused on selling their services to other businesses and governments.

I think there's a more foundational way to play prediction markets and the AI programs people are beginning to use with them. You might not be able to buy shares of Kalshi yet, but you can buy shares of Taiwan Semiconductor Manufacturing (NYSE: TSM).

Image source: Getty Images.

The ultimate pick-and-shovel play for AI

Taiwan Semiconductor is one of the best pick-and-shovel plays for the entire tech industry. All the server banks at prediction market data centers, all the agentic AI programs people are using to interact with prediction markets, and all the phones and computers people are trading with require semiconductors.

Semiconductors -- chips that are between an electric conductor like copper and a resistor like rubber -- are the foundation of the entire tech industry. They have allowed computers to grow in power while shrinking in size over the past half-century or so.

And TSMC produces a full 60% of global semiconductor output. It produces 90% of the advanced chips that sophisticated AI programs need to run.

Taiwan Semiconductor controlled a 72%-and-growing share of the global pure foundry semiconductor market as of the end of the third quarter of 2025. Second place goes to Samsung (OTC: SSNLF) at 7%.

See, most semiconductor and chip companies, like Nvidia and Qualcomm, might design chips, but they outsource the bulk of their production to foundry companies like Taiwan Semiconductor.

For instance, Nvidia's advanced Blackwell chips are made at Taiwan Semiconductor's factory in Arizona. It's worth noting that Taiwan Semiconductor is investing another $165 billion into that factory to expand its American manufacturing footprint.

You might imagine that being the world's factory for one of its most important components is a good spot to occupy. You'd be right.

It's good to be (the semiconductor) king

Taiwan Semiconductor's Q4 and full-year 2025 results were nothing short of spectacular.

Net revenue for the year totaled $122.4 billion, up 35.9% over 2024. The company's gross margin and operating margin grew 3.8 points and 5.1 points to reach 59.9% and 50.8%, respectively. And Taiwan Semiconductor's diluted earnings per share (EPS) for 2025 surged 46.4% over 2024.

In 2025, the company also grew its operating cash flow 24%, its free cash flow 15.2%, and its cash and marketable security reserves 26.7%.

And, to illustrate the incredible opportunity of AI and by extension everything people are doing with it (like using it on prediction markets), a full 77% of Taiwan Semiconductor's Q4 2025 revenue came from its production of 7-nanometer chips and smaller.

Those are the chips needed by AI data centers and other advanced hardware.

To further drive that point home, for the whole of 2025 Taiwan Semiconductor generated 58% of its revenue from high-power computing chip production, which includes AI. That segment also grew 48% year over year in 2025.

Finally, while it's a low yield due to Taiwan Semiconductor's incredible 315% bull run over the last two years and change, the company does pay a dividend. Its yield is only 0.8% but the company's payout ratio is just 30% so it has plenty of room to grow. Taiwan Semiconductor has grown its dividend payout for five years running.

So, if you want the ultimate pick-and-shovel play for tech and the part of it made from prediction markets, Taiwan Semiconductor makes a pretty good case for itself.

James Hires has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Interactive Brokers Group, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2027 $43.75 calls on Interactive Brokers Group and short January 2027 $46.25 calls on Interactive Brokers Group. The Motley Fool has a disclosure policy.