Since the launch of OpenAI's next-generation chatbot ChatGPT in November 2022, artificial intelligence (AI) has become the ultimate buzzworthy topic. With AI now increasingly entrenched in people's daily lives, investors have also started taking a keen interest in AI stocks.
However, amid this AI frenzy, it is essential to separate reality from fantasy. Shares of several companies with nascent AI technologies have already shot to the moon. Instead of picking up these high-risk expensive stocks, investors can get AI exposure by focusing on established companies with proven AI technologies.
Here are two AI stocks that seem poised for solid growth in the coming months.
Intuitive Surgical
Long before AI became glamorous, robotic surgery player Intuitive Surgical (ISRG +0.35%) had been leveraging AI and machine-learning technologies for improving surgical outcomes. The company's flagship da Vinci surgical system has robotic arms that precisely mimic a surgeon's hand movements to perform general, bariatric, and urology procedures in a minimally invasive fashion. Using data from previous procedures, the system's AI algorithms help surgeons plan for operations, make informed decisions during operations, and develop customized treatment plans for patients.
NASDAQ: ISRG
Key Data Points
In 2022, the da Vinci system was used to perform over 1.8 million procedures. To date, over 12 million procedures have been performed globally. With a broad installed base of 7,779 da Vinci systems (at the end of March 2023), the company also enjoys solid recurring revenue streams from the sale of instruments, accessories, and services. In 2022, recurring revenue accounted for 79% of the company's total sales.
Considering that a single da Vinci system costs between $500,000 and $2.5 million and involves significant additional training expenses, it becomes difficult for hospitals to switch to competing products. The high switching costs have further helped build a sticky customer base, which is a solid plus for any technology company. This will help the company fend off competition from other medical device players such as Stryker, Abbott Laboratories, and Medtronic.
The success of Intuitive Surgical's razor-and-blade business model is obvious when looking at the company's robust financials despite foreign-exchange headwinds and pandemic-related disruptions in China. In the first quarter (ending March 31, 2023), revenue was up by 14% year over year to $1.7 billion, driven by a 26% year-over-year rise in procedures. The company placed 312 systems and increased its installed base by 12% year over year in the first quarter.
Investing in Intuitive Surgical, however, is not for the faint of heart. The company is currently trading at a P/E multiple of 89, close to the higher end of its historical valuation and much above the S&P 500's average P/E of 24.3. Hence, while the company has significant upside potential due to its moat in the robotic surgery space, only long-term risk-tolerant investors who can accept the extremely expensive valuation should consider opting for this AI stock now. Investors can further minimize their risk by building a position gradually using the dollar-cost averaging strategy.
Lemonade
The use of AI is nothing new for insurtech company Lemonade (LMND +2.91%). Unlike traditional insurers, which require significant human intervention, this digital-only insurance company leverages machine learning, AI, and chat capabilities for pricing and selling insurance policies as well as for settling claims in a matter of seconds. The company also uses AI to identify challenges and opportunities for its insurance portfolio. Additionally, Lemonade is now gearing up to automate and improve over 100 business processes with generative AI and expects to generate significant cost savings in the next 18 months.
NYSE: LMND
Key Data Points
Lemonade is focused mainly on younger tech-savvy customers and aims to cater to most of their insurance needs. To that effect, the company offers a broad suite of insurance products (renters, homeowners, auto, pet, and life policies) and has been quite successful in cross-selling and upselling them to clients. The benefit of this flywheel effect is apparent considering that the company ended the first quarter with 1.86 million customers, up 23% on a year-over-year basis. Lemonade also reported a 26% year-over-year jump in average premium per customer to $352.
After a string of disappointing earnings results in the past couple of years, Lemonade seems to be finally inching toward profitability. While it has consistently reported double-digit top-line growth, investors were worried about the company's deteriorating loss ratio (paid insurance claims and adjustment expenses as a percentage of total earned premiums). The increase in the loss ratio was related mainly to the rapid introduction of new products in new markets -- which is a necessary move for any growing company.
However, the pain may now be starting to ease. In the first quarter, Lemonade reported a loss ratio of 87%, a year-over-year improvement from the loss ratio of 90% in the same quarter of the prior year. The company also reported a net loss of $65.8 million in the first quarter, an improvement from a net loss of $74.8 million in the same quarter of the prior year.
Lemonade is nowhere close to breakeven, although losses are definitely narrowing down. Plus, the company is currently trading at a price-to-sales ratio of 3.9, close to its historically low valuation levels. This company with proven and monetized AI technology can be an attractive pick for investors.
