2023 is the year of artificial intelligence (AI) in the stock market.
The launch of ChatGPT from OpenAI late last year set off a frenzy for generative AI and related tools, and some tech leaders expect it to be one of the biggest technologies ever. Alphabet CEO Sundar Pichai even said AI could be more significant than fire or electricity.
Not surprisingly, AI stocks have soared on expectations for the transformative technology, and some media outlets have even declared a new bull market, driven largely by gains in the tech sector and excitement over AI.
With businesses set to invest tens of billions in the new technology, AI is likely to be a major driver in the next bull market. Keep reading to see two AI stocks that could soar in the coming years.
Image source: Getty Images.
1. Upstart
Upstart (UPST 2.76%) is a consumer loan originator and servicer that uses AI to screen applicants and determine their creditworthiness. It calls itself the leading AI lending marketplace.
The company uses more than 1,500 variables and 44 million data events to come up with a credit rating system that allows for higher approvals and a lower default rate compared to traditional FICO scores.
According to Upstart, its AI achieves 53% fewer defaults at the same approval rate as large banks, or 173% more approvals at the same default rate. As you might imagine, there's huge potential in this kind of technology if it's as effective as Upstart claims it to be.
Currently, Upstart only originates consumer and auto loans, but the company is planning to enter the home equity line of credit market later this year, tapping into the home loan marketplace. That's an addressable market of $2.7 trillion, which is significantly larger than the personal and auto loan markets. Upstart aims to enter the small business lending market as well.
The stock surged in 2021 shortly after its initial public offering (IPO), when the economy was strong and interest rates were low. But shares crashed last year as rates have gone up, lending standards have gotten tighter, approvals have gone down, and Upstart's lending partners have backed off, though it continues to add new ones.
However, there are signs that the company is turning the corner -- it expects revenue to grow sequentially in the current quarter, and the stock has started to rebound this year, up over 170% year to date. Upstart could shine in the next bull market, especially if investors embrace its AI model and the product lives up to the company's own assessment. Upstart's market cap is just under $3 billion as of this writing, so there's plenty of room for shares to soar.
2. Lemonade
In many ways, Lemonade (LMND 1.64%) is trying to do to the insurance market what Upstart is doing to the consumer lending market.
Lemonade is an AI-first insurance company that uses the technology to screen applicants and determine more accurate pricing. It also has chatbots that handle customer applications and claims, plus about 50 machine-learning models that are trained on hundreds of millions of customer interactions. Those models generate lifetime value predictions for every customer, campaign, product, and geography that Lemonade operates in.
Lemonade started with offering renters insurance and now offers insurance across a wide range of product categories, including renters, pet, auto, and homeowners.
Thus far, the company is still operating at a significant loss as it invests resources in growth. But it is growing fast, and its loss ratio has improved. In-force premium, or the total annualized value of the premiums on its books, grew 56% to $653 million in its most recent quarter, and its gross loss ratio declined from 90% in Q1 2022 to 87% in Q1 2023.
Like Upstart, Lemonade shares also skyrocketed shortly after the 2020 IPO, but the stock crashed in the bear market. The company's business model is still unproven, and its losses are mounting with a net loss of $65.8 million on $95.2 million in revenue in the first quarter. That was an improvement from the prior year, but it indicates the company has a long way to go to be profitable.
Still, Lemonade has a clear head start in using AI in insurance, and it has a lot of upside potential if it can successfully disrupt the industry.
Its market cap today is just north of $1 billion after gaining 23% so far this year, meaning the market is still skeptical of its prospects.
