This year's economic slowdown dealt a blow to technology investors, who are contending with rivers of red ink in their portfolios. The tech-heavy Nasdaq-100 stock market index has declined by 29% in 2022 so far, but a cohort of stocks in the artificial intelligence (AI) sector have fared significantly worse.
Shares of Upstart Holdings (UPST -2.23%), C3.ai (AI -2.32%), and Lemonade (LMND -5.11%) each lost more than 80% of their value from their all-time high stock prices, but that might not be a fair representation of their underlying businesses, which are still growing and improving.
There have been some early signs that inflation peaked back in June, which could result in far more favorable economic conditions in 2023. That might reignite investors' appetite for high-growth technology stocks, making the above-mentioned names look like bargains at current levels.
NASDAQ: UPST
Key Data Points
Upstart stock is trading at a rock-bottom valuation
Upstart is on a mission to transform the lending industry by using AI to analyze up to 1,600 data points on potential borrowers and coming to an instant decision about their creditworthiness. Traditionally, banks rely on Fair Isaac's narrower FICO credit scoring system, which Upstart says hasn't kept pace with the modern economic and employment landscape. Plus, current methods of assessment can take days or weeks to deliver a decision.
Upstart doesn't lend any money itself, but rather gets paid by its bank partners to originate loans. The company has suffered a two-pronged challenge this year amid the slowing economy: Its funding partners have a lesser appetite to purchase these loans, and with interest rates on the rise, consumers simply aren't seeking as much credit.
As a result, Upstart's projected annual revenue growth for 2022 is set to grind to a halt. After soaring by 264% to $849 million in 2021 compared to 2020, it's expected to fall slightly this year to $830 million. But there are some positive signs beneath the surface.
The number of banks and credit unions signing on to use Upstart's AI-driven approach soared by 167% in the recent third quarter (ended Sept. 30). Plus, the number of car dealers adopting its Upstart Auto Retail sales and loan origination software jumped 141%, with 37 of the world's top automotive brands now on the platform.
It hints that the recent slowdown in the company's revenue growth might only be temporary, and if the economy does pick up steam in 2023, Upstart could experience a resurgence. Given its stock trades at a rock-bottom price-to-sales (P/S) ratio of just 1.7, investors who take the leap at current levels could be handsomely rewarded.
NYSE: AI
Key Data Points
C3.ai is gearing up for a new growth phase
What do Amazon, Microsoft, and Google parent Alphabet have in common? All three partnered with enterprise artificial intelligence pioneer C3.ai to boost their respective cloud services platforms.
C3.ai has effectively created a brand-new industry, where it helps businesses across at least nine different sectors gain access to AI technology. It provides ready-made and customizable applications for a range of different purposes. The oil and gas industry, for example, uses C3.ai to monitor critical equipment to predict failures, which helps to prevent environmental disasters. It also uses the technology to boost efficiency and produce cleaner fossil fuels.
The major cloud players named above use C3.ai to increase their customers' productivity. On Amazon Web Services, an AI application can be developed up to 26 times faster than if C3.ai wasn't integrated into the platform. As a result, these tech giants sell some of their cloud services with C3.ai jointly.
C3.ai is in the middle of a major transition to the way it charges its customers. It has always sold its services under subscription agreements, which are predictable, but which have a long sales cycle because of the time it takes to negotiate pricing. It's now moving to a consumption-based model, which will result in a slowdown in revenue growth initially but could deliver accelerated gains over the long run. This will also allow C3.ai to onboard new customers far more quickly, which could in turn boost sales growth even further.
For context, the company expects its annual revenue growth to come in flat by the close of fiscal 2023 (ending Jan. 31), but the new consumption-based model could supercharge it to a 30% increase next year.
C3.ai stock is down over 90% from its all-time high, and the company now trades at a valuation of just $1.5 billion. But excluding its $840 million in cash, investors value the business at under $700 million, or a minuscule P/S ratio of less than 3. The company, however, believes its addressable opportunity could be worth $596 billion by 2025.
NYSE: LMND
Key Data Points
Lemonade is reshaping the insurance industry
Traditional insurers have a reputation for relatively slow and onerous claims processes, but what if, through the power of AI technology, you could lodge a claim and be automatically paid out in under three minutes? That's the customer experience Lemonade aims to deliver across its homeowners, renters, life, pet, and car insurance products.
AI powers most aspects of its business, including the way it prices premiums. Earlier this year, the company unleashed its most predictive AI model yet, called Lifetime Value 6 (LTV6). It attempts to determine the lifetime value of a customer based on their likelihood of switching insurers, the probability of them purchasing multiple policies, and the odds of them making a claim. From there, Lemonade calculates an appropriate premium.
But LTV6 dives even deeper into Lemonade's business, identifying underperforming geographic markets and products to allow the company to rapidly pivot to optimize its financial performance.
Overall, Lemonade has attracted more than 1.77 million customers. Its average premium per customer soared 35% in the recent third quarter to $343, which was an all-time high. Additionally, and with the help of its recent acquisition of MetroMile, Lemonade's in-force premium jumped 76% to $609 million. In-force premium is the metric by which most insurers measure success, as it represents the value of premiums paid for active policies.
Lemonade has focused on investing in growth, and it's clearly working, but it has come at the expense of profitability. It's attempting to swing its bottom-line into the black and believes it can do so with the cash it has on hand without requiring any fresh capital. With Lemonade stock down 89% from its all-time high, investors who buy now might benefit over the long term if the company does successfully reach that profitability milestone.
