Investing In AI Stocks

Artificial intelligence (AI), for all its futuristic elements, is by no means a new category. The roots of this technology go back to the late 50s when computers started to become a lot more powerful.

But the proliferation of AI stocks didn’t come until much more recently, as AI became commercially viable within the past decade. This is due to a variety of factors, including the use of sophisticated graphics processing units (GPUs), the evolution of cloud computing, growth in open-source software, and the explosion of data.

AI uses algorithms to detect patterns, helping businesses to create predictions that ultimately improve productivity, lower costs, and increase revenues.

Artificial intelligence is a huge market opportunity. Use cases of AI include virtual assistants, autonomous vehicles, knowledge management, digital workplace, and crowdsourced data.

Let’s look at some of the AI stocks that stand out from the crowd.

C3.ai

Market value: $1.9 billion

Billionaire Tom Siebel has an uncanny knack for identifying “the next big thing” in tech. Back in the early 1980s, he joined Oracle as an executive and helped drive growth in the relational database market. In the early 1990s, he started the company Siebel Systems, which quickly became a dominant platform for customer relationship management software (Oracle eventually purchased Siebel Systems in 2005). Siebel then moved into the enterprise AI space, starting C3.ai (AI) in 2009. He used his extensive contacts and background to snag some of the world’s biggest customers, including Shell (SHEL), Raytheon Technologies (RTX), and Enel (ENLAY).

C3.ai’s platform offers a system for existing CRMs (customer relationship management software) to implement sophisticated revenue forecasting, personalization, and retention. C3.ai has also built various modules for different industries, including manufacturing, healthcare, financial services, and life sciences. Of note is the C3 AI Data Vision product. Unlike traditional AI systems using forms and table-based approaches, which are more visual and interactive, making for a better user experience.

C3.ai has proved that its technologies are strategic, and this has led to strong growth in existing accounts. For example, Baker Hughes (BKR) recently expanded their contract value by $45 million up to $495 million. The public sector is another important source of growth for C3.ai. In early December, the company struck a five-year deal to work with the U.S. Department of Defense, bringing in a whopping $500 million. The project is aimed at accelerating “research projects in simulation, modeling, and production deployments for operations and sustainment.”

Lemonade

Market value: $1.2 billion

Israeli tech entrepreneurs Daniel Schreiber and Shai Wininger founded Lemonade (LMND) in 2015. They seized an opportunity to leverage data analytics and AI to transform the insurance industry.

Customers take out a policy by interacting with a bot. The process takes around 90 seconds or so. Lemonade also uses bots to handle some claims, which take about three minutes, but about a third of claims will still need the help of a human agent.

Those efficiencies have led to higher customer satisfaction and lower costs. Lemonade claims its pricing is 19% lower than Allstate’s, and 16% lower than State Farm’s.

Initially, Lemonade provided renters and homeowners insurance. But the company has since expanded into pet health, automobile and term life insurance.

In the first quarter of 2022, its aggregate annualized premiums jumped by 66% year-over-year to $419.0 million. Meanwhile, the customer base and premium per customer increased by 37% and 22%, respectively. Lemonade now has around $1.0 billion cash in the bank.

The market opportunity for Lemonade is huge. Consider that the overall premiums for casualty, property and life insurance are around $5 trillion across the globe. Eating into that market over time – mainly by attracting younger customers – would likely see LMND become one of the hottest AI stocks you can buy.

“We believe as leaders in the digitization of insurance, Lemonade can utilize easy-to-use customer-facing applications and deep data capabilities to capture GenZ, Millennial, and first-time insurance purchasers,” said Oppenheimer analysts. “As customers age, their insurance needs grow, and we see them cohorting with Lemonade due to recent expansion from monoline business offering, with the early results enticing them.”

Upstart Holdings

Market value: $3.1 billion

Dave Girouard left Alphabet (GOOGL) in 2012 and cofounded Upstart Holdings (UPST). The idea was to create an online platform that allows investments in people in exchange for future earnings. But the project failed to catch on.

With the company’s cash dwindling, Girouard pivoted to becoming a regular lender, with one major difference: Girouard built a top-notch AI team to create algorithms that improve loan underwriting. The aim was to replace the FICO model, which meant using diverse sets of data that went well beyond a person’s payout history. This allowed Upstart to issue loans at lower rates with reduced risk levels.

Despite the initial skepticism, Upstart grew at a rapid clip. A key part of its business model included partnering with financial institutions to handle loan processing.

Revenues have jumped from $51.2 million in 2017 up to $801 million in 2021. In the first quarter of 2022, revenues grew by 156% year-over-year to $310 million. Unlike many of the younger AI companies, Upstart is soundly profitable. It has reported generally accepted accounting principles (GAAP) net income that tripled to $32.7 million.

UPST has one major headwind to consider; Upstart and the CFPB (Consumer Financial Protection Bureau) mutually terminated the company’s no-action letter, which safeguarded lenders from prosecution on fair lending law violations with respect to the underwriting algorithm.”

A 75% plunge in shares has made UPST more attractive from a valuation basis. The company boasts roughly $760 million in cash, which should help to weather the short-term economic uncertainty.

Palantir Technologies

Market value: $18.4 billion

Palantir Technologies (PLTR) launched in 2003, and it is a pioneer in the commercial AI market. They originally built sophisticated systems for the U.S. government to help track terrorists and other enemies in Iraq and Afghanistan. While it is still not confirmed, media reports suggest that Palantir’s technology played a crucial role in finding Osama bin Laden.

The government business is still a strong source of growth, but Palantir has tooled its AI platform to cater to the private sector, serving industries including healthcare, manufacturing, and energy.

PLTR continues to grow. During the first quarter of 2022, its revenues were up 31% year-over-year to $446 million, led by a 54% jump in commercial sales (vs. the 16% growth for government revs). The company has over $2 billion in the bank and has generated more than $30 million in adjusted free cash flow (FCF is money left over after a company pays interest, tax, expenses, and long-term investments to grow its business).

“Palantir’s strong position in the AI-powered software market, differentiated end-to-end and highly secure solutions, as well as its first mover advantages, should support upwards of 30% annual revenue expansion and improving profits in the midterm,” a team of BofA analysts reported.

Among its potential growth drivers is Apollo, which is Palantir’s new AI product. “Apollo is one of the few software-as-a-service (SaaS) providers that have been cleared for IL-5 high-sensitivity controlled unclassified information (CUI), National Security Systems, and mission-critical information by the DoD,” says BofA.

Nvidia

Market value: $409.0 billion

When it comes to AI stocks, companies making models and algorithms usually get the most attention. But you cannot have the software without powerful hardware behind it – the larger the datasets, the more sophisticated the processing chips have to be.

Nvidia’s AI technologies have brought wild growth to its data center segment, which relies heavily on analytics. In the first quarter, data center revenues shot up by 83% year-over-year (and 15% sequentially) to $3.75 billion, powering the overall sales of $8.3 billion (up 46% year-over-year).

But Nvidia doesn’t just do GPUs. The company is also in the AI software game. It uses SDKs (software development kits) for natural language processing (NLP), vehicle route planning, logistics, and more. Moreover, its gaming chips just logged 31% year-over-year revenue growth in the first quarter, bringing in a cool $3.6 billion.

The company is also gunning for the metaverse. Nvidia is ideally positioned for that because of its high-end graphics and AI expertise and has recently launched the Omniverse Enterprise, which is a set of tools for creating AI-based avatars.

Nvidia has got its fingers in numerous AI pies, making it one of the hottest AI stocks you can find.

Sumo Logic

Market value: $898.1 million

Data fuels AI, but it can be a bother to work with. Missing items, errors, outliers, and more can result in skewed models.

Quality data systems can help, though, and that’s where Sumo Logic (SUMO) comes in. The company was founded in 2010 and has developed a cloud-native platform with sophisticated tools to analyze enormous datasets. The platform manages more than 200 petabytes (1 million gigabytes) of data from more than 20 million searches every day.

The main use case for Sumo Logic was initially cybersecurity, as the technology can process data in real-time. But in the past few years, it has expanded into other categories like applications and infrastructure, as well as business intelligence.

Sumo Logic continues to add to its platform. Some of the recent enhancements include more threat protection features, observability capabilities, and added data sources and integrations, which should help to bolster growth in the near future.

Alphabet

Market value: $1.5 trillion

In 2017, Alphabet (GOOGL) CEO Sundar Pichai declared it was an “AI-first company.” But AI has actually been a part of its DNA since its founding. PageRank, the original search technology, was based on advanced models and algorithms.

You could argue that Alphabet may be one of the oldest AI stocks.

Google built its artificial intelligence platforms because there was nothing available on the market that worked at scale. One of these innovations was TensorFlow, which enabled the creation of deep learning models. Alphabet launched it as open source, and it has become a standard in AI.

The company infused this technology across products, including Gmail, Photos, Maps, YouTube, and Google Cloud. The result? This allowed Alphabet to provide increasing amounts of personalization, thus, improving engagement and monetization.

The company is now building its own AI chips, such as the Google Tensor, which is a unique system-on-a-chip that makes processes like machine learning much more efficient. Alphabet uses them on their Pixel smartphones.

Alphabet has also been a long-term investor in autonomous driving. Their Waymo division includes an autonomous ride-hailing service in Phoenix, which has the potential to transform the transportation industry. It is also developing a south Dallas trucking hub that can support commercial freight routes.

In the summer of 2021, Waymo raised $2.5 billion from investors such as Andreessen Horowitz, Silver Lake, AutoNation (AN), and Tiger Global. It is entirely possible that the division will launch an IPO (initial public offering) in the next few years.

Duolingo

Market value: $3.8 billion

Duolingo (DUOL) has the leading mobile learning app, with over 500 million downloads since its launch in 2012.

The company’s growth has been mostly organic and word-of-mouth. It has more than 49 million monthly active users (MAUs) and is the top-grossing app for education on both the Apple App Store and Google Play.

But how does DUOL belong on a list of AI stocks?

One of its main advantages is its massive dataset, which includes over half a billion daily exercises completed on the platform – which Duolingo believes is the highest in language learning.

With this data, Duolingo has a team of data scientists build and refine artificial intelligence models using concepts like NLP and cognitive science. One use case is the BirdBrain system (the student model). It evaluates every answer and adapts the exercises that are “just right” in regard to the difficulty level.

By using AI, Duolingo has created a more personalized experience, which has helped greatly with engagement and monetization.

Riskified

Market value: $782.4 million

Traditional anti-fraud systems used by e-commerce platforms are rule-based and utilize manual approaches. They can also be expensive.

Riskified (RSKD) believes it has a better way, leveraging AI to detect potential fraud – something that can lower e-tailers’ operating costs and improve customers’ buying experience. Some of its customers include Trip.com (TCOM), Dick’s Sporting Goods (DKS), Wish, and Steve Madden (SHOO).

The AI system boasts over 1 billion historical transactions from some of the world’s largest merchants. The company says it captures 100 different data points for every transaction.

A further critical part of Riskified’s strategy is its business model. Riskified provides a chargeback guarantee, which makes it easier for prospective customers to try out the service.

The most recent quarter saw a 20% year-over-year improvement in GMV (gross merchandise value), and against difficult comparisons, at that.

UiPath

Market value: $10.7 billion

UiPath (PATH) is the leading developer of RPA (robotic process automation) technology. This allows companies to create software bots that can automate tedious and repetitive processes like working with enterprise resource planning (ERP) systems or CRM.

RPA does not necessarily have to be AI; it often involves hard-coding bots to perform certain tasks. However, UiPath has aggressively leveraged AI such as NLP and computer vision. For example, the AI can optimize processing and automate bot creation. It can also provide for email classification, document interpretation, and mining tasks. A few of the ways this can be utilized includes inventory forecasting, loan default prediction, and invoice extraction.

Given its scale, UiPath is among the fastest-growing enterprise software companies. Its most recent quarter’s annual run rate was up 49.7% year-over-year, which was better than consensus expectations.

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