Earnings season for the quarter ended June 30 is drawing to a close. The majority of the tech sector has now reported, and there were some mixed results as consumers continue to grapple with soaring inflation and rising interest rates. But when it comes to investing in advanced technology like artificial intelligence (AI), the best approach is to take a long-term view of a decade or more.
Why? Because that's when the most value will be created. According to an estimate by McKinsey & Company, artificial intelligence will increase economic output by $13 trillion by 2030, with the overwhelming majority of the corporate sector using the technology to boost their businesses.
Upstart Holdings (UPST 0.90%), Lemonade (LMND 3.44%), and C3.ai (AI 24.52%) are three tiny AI stocks each valued at $2 billion or less that are applying the technology in different ways. Here's why they could deliver significant upside in the long run as part of a balanced portfolio.
Upstart is transforming the lending business
Upstart stock has taken investors on a roller-coaster ride since its public listing in December 2020 at $20 per share. It soared to as high as $401 last year before gradually sinking back to $24 as of this writing.
Why? Well, the company's AI-driven consumer lending model performed incredibly well when the economy was strong, but it now faces a real test as soaring inflation sends interest rates higher at a rapid pace.
Upstart's primary goal is to improve upon Fair Isaac's decades-old FICO credit scoring system, which it says is far less suitable for the modern economy. Upstart's model can analyze 1,600 data points on a potential borrower compared to FICO's five, and thanks to AI, it can deliver a decision instantly about 73% of the time.
Despite a recent industry-wide uptick in loan defaults and a broad deterioration in credit quality, the company says they remain within its models, but it might take some time for investors to be convinced. Still, banks and credit unions are flocking to adopt Upstart's AI algorithm, with 71 now using it as of the recent second quarter, a 184% jump compared to the year-ago period. Likewise, car dealership partnerships soared 221% to 640 year over year for the company's Upstart Auto Retail sales and loan origination platform.
Upstart withdrew its full-year revenue guidance for 2022 amid the unpredictable economic environment, but analysts are betting on modest growth of 5% to $896 million. That's a far cry from the company's 264% sales growth in 2021, but it's all about the long term, and Upstart has identified about $6 trillion worth of annual opportunities in the loan origination space. If it weathers this challenging period, Upstart stock could be poised for upside.
Lemonade is changing the face of insurance (literally)
The face of your insurance company no longer needs to be human -- as long as your insurance company is Lemonade. Its AI-powered online bot, Maya, can write quotes and pay claims in minutes instead of days or weeks, without human intervention most of the time. But that's not even the most exciting way Lemonade is applying AI.
In the recent second quarter, the company unveiled its sixth-generation AI model for pricing insurance premiums called LTV6. It's designed to calculate the lifetime value (LTV) of a customer based on their likelihood of making a claim, switching insurers, and their potential for purchasing multiple Lemonade policies. It allows Lemonade to charge more accurate premiums than it ever has.
The company operates in five key markets, including renters, homeowners, pet, life, and car insurance. Car insurance could be Lemonade's most promising opportunity yet, and it already represents 20% of its business thanks to its recent acquisition of MetroMile. In 2022 alone, car insurance is set to be a $316 billion opportunity in the U.S.
That leaves plenty of room for growth because, despite a rapid 58% increase in the second quarter, Lemonade's total in-force premium stands at just $458 million. The company is now charting a path to profitability after attracting over 1.5 million customers and investing heavily in expansion. With Lemonade stock currently down 86% from its all-time high, this could be an opportune long-term entry point.
C3.ai is increasing access to AI
For 228 businesses in 11 different industries, C3.ai is the answer to accessing artificial intelligence. The company specializes in delivering ready-made, customizable applications that allow its customers to harness the power of advanced technology without the challenge of building it from scratch.
C3.ai serves manufacturers, financial services companies, and even oil and gas giants, among others. It has even attracted partnerships with trillion-dollar technology behemoths like Microsoft and Google parent Alphabet. Together, they're building more capable AI tools that can be delivered in the cloud through Microsoft Azure and Google Cloud.
In its report for the recent first quarter of fiscal 2023 (ended July 31), C3.ai told investors that the difficult economic environment was making its customers more cautious when committing to large contracts, and this could result in revenue growth of just 7% for the full year. Its stock subsequently fell by about 20% but, again, the long-term story is far more important than any one quarter.
For example, C3.ai anticipates its market opportunity could top $596 billion by 2025, and it's currently transitioning from subscription-based pricing to a consumption-based model, which it expects will supercharge its revenue growth and make its technology more financially accessible for new customers going forward.
C3.ai is one of the most exciting AI opportunities because of its diverse exposure to so many different industries. Its stock is cheap right now, valued at just $1.57 billion -- or $670 million net of its $900 million in cash, a mere 2.5 times the company's fiscal 2022 revenue of $251 million. For a long-term bet on the future of artificial intelligence, C3.ai stock makes a lot of sense.