Investors who face uncertain retirement prospects face a dilemma: If they pick overly conservative investments, they may never make enough gains to retire. However, if they take on too much risk, they could easily wipe out the capital they have accumulated.
For these reasons, such investors must consider both safety and growth potential when choosing a high-growth AI stock. Fortunately, the market offers choices that provide that balance, and some selections could provide the needed long-term growth and, possibly, set investors for life.
Duolingo's stock isn't for every investor, but its skyrocketing growth can't be ignored
Jake Lerch (Duolingo): I love discovering great stocks. And one of the best ways to find them is by observation: What products are people talking about? What services are exploding in popularity?
It also comes from personal experience, which is what brought Duolingo (DUOL 3.64%) to my attention.
The company operates a language-learning application and website that helps people learn foreign languages. It's also an under-the-radar AI stock that partners with OpenAI's GPT-4 for a variety of purposes. Duolingo uses AI to generate content, customize learning for its users, and even engage in realistic roleplay chat scenarios.
From an investment perspective, Duolingo isn't going to be for everyone; this is a young, growth-oriented stock with a market cap of only $6.5 billion.
However, it is growing -- and fast.
The company reported a 42% year-over-year jump in revenue during its most recent quarter (the three months ending on March 31). Daily average users (DAUs) and monthly active users (MAUs) -- both closely watched metrics for a young user-driven company like Duolingo -- soared by 62% and 47%, respectively. Paid subscribers, which generate about 75% of Duolingo's revenue, increased from 2.9 million in Q1 2022 to 4.8 million in Q1 2023.
At any rate, growth-oriented investors would be wise to keep Duolingo on their radar. And for those who believe that companies will need to aggressively integrate AI into their operations, Duolingo is an excellent name to consider for the long term.
A small insurance company with substantial potential thanks to AI
Justin Pope (Lemonade): Insurance isn't new; today's biggest insurance companies have been around since the early 1900s, and consumers purchase insurance for their health, homes, pets, and just about anything else you can imagine. The property and casualty insurance industry (property and possessions) is worth more than $1 trillion worldwide.
Thanks to AI, Lemonade (LMND 1.64%) is wedging itself into this massive and competitive field. While traditional insurance companies rely on a network of agents to sell policies and service policyholders, Lemonade has stripped all that excess out. It uses AI-powered chatbots to handle those duties. Using Lemonade, users can sign up for a policy in as little as 90 seconds and file a claim in three minutes through a smartphone app. Lemonade offers renters, homeowners, pet, auto, and life insurance products.
The digital user experience resonates with customers; Lemonade is growing rapidly, increasing its customer count by 23% year over year in its first quarter to 1.8 million, and growing in-force premiums, the company's cumulative policy payments received, by 56%. It's getting better at analyzing risk as it grows, too; the company's gross loss ratio, which measures claims paid to premiums received, shrank to 87% in Q1 from 121% the prior year (lower is better).
Lemonade isn't profitable yet, but it is well funded, with $993 million on its books. After burning $46 million in cash in Q1, it can finance the company for a long time at that rate without needing any more money. Meanwhile, Lemonade has a market cap of just $1.5 billion today -- more than half the company's value is cash.
Its small size in such a competitive industry makes this stock riskier than most you'll come across. However, the stock has an impressive long-term upside if Lemonade can improve its loss ratio and turn its business profitable over time.
Keeping "shop" in this stock could enrich investors
Will Healy (Shopify): Admittedly, a stock like Shopify (SHOP 1.11%) might not look like such an excellent choice from a certain point of view. Numerous competitors offer e-commerce platforms, and despite recent stock price growth, Shopify sells at a discount of approximately 65% from its all-time high.
Nonetheless, Shopify could eventually surpass record levels. Its site has stood out above competitors for its emphasis on speed and flexibility. This flexibility includes an AI-powered tool called Shopify Magic that helps clients write product descriptions.
It has also built an extensive ecosystem that includes fintech, inventory management, customer service, and marketing functions. This helped it become the most popular e-commerce platform in the U.S. and the second most popular globally.
Moreover, IMARC Group predicts e-commerce will grow at a 27% compound annual growth rate through 2028, taking the size of the e-commerce market to $71 trillion. That should give Shopify tremendous room for growth.
That growth potential expanded further when Shopify decided to sell its fulfillment services to Flexport. Fulfillment is a capital-intensive, low-margin business, and selling that operation has already returned Shopify to profitability.
In the first quarter of 2023, revenue of $1.5 billion surged 25% higher. Indeed, Shopify reported an operating loss, and the surprise net income of $68 million came from interest income and unrealized gains in some investments.
Nonetheless, financial conditions should improve rapidly. For Q2, Shopify expects revenue increases similar to Q1 but with lower growth in operating expenses. This increases the likelihood that Shopify will become profitable soon from an operations standpoint.
Investors have taken notice, and Shopify stock has risen 85% higher year to date. Still, this should not deter prospective buyers. Even though the P/S ratio is now at 14, it is far lower than in 2021, when Shopify almost always traded above 40 times sales. This indicates Shopify could continue rising higher, likely leaving future retirees with increasing wealth.
