Since the launch of the generative chatbot ChatGPT, artificial intelligence (AI) has become a major investment theme on Wall Street. This is not surprising, considering that the world is increasingly becoming aware of AI's potential to disrupt several traditional industries.
However, you don't need boatloads of cash to get exposure to this latest Wall Street trend. If you've got just $100 (which you don't need for contingencies and paying bills), you could buy a few shares of one of these AI stocks.
Here's why adding these high-quality AI stocks to your portfolio can prove to be a lucrative decision in the long run.
1. Palantir
Shares of leading data mining and analytics company Palantir Technologies (PLTR 3.73%) have gained by nearly 157% so far this year. Undoubtedly, this price hike is mainly due to investor enthusiasm for all things AI.
Long before AI became a prominent investment theme, Palantir's cloud-based software offerings (Gotham, Apollo, and Foundry) have been leveraging AI and machine-learning (ML) algorithms to derive actionable insights from huge troves of structured and unstructured data from diverse sources. While previously focused mostly on government clients, the company is increasingly catering to private organizations -- thereby reducing its excessive dependence on the government sector. According to a recent report by Forrester Research , Palantir was ranked as a global leader among top AI/ML vendors.
To further penetrate the ever-expanding AI market, Palantir recently launched an AI platform that adds large language model capabilities to its existing ML technologies. This new offering will enable the company to target the rapidly expanding global generative AI market, which is expected to be worth $13.7 billion in 2023.
Besides long-term AI initiatives, Palantir is also showing significant improvement in its financial performance. The company reported a reacceleration of its U.S. commercial business, which saw revenue jump by 26% year over year to $107 million.
The company also reported its first-ever generally accepted accounting principles (GAAP) operating profit of $4.1 million in the first quarter (ending March 31, 2023). Palantir also reported GAAP profitability for the second consecutive quarter and is already operating-cash-flow and free-cash-flow positive. Management expects the company to be GAAP profitable on an annual basis in 2023. The company also has cash of $2.9 billion on its balance sheet and $259 million in debt, implying that it is capable of funding its growth initiatives.
Currently, Palantir is trading at 17.6 times trailing-12-month sales, far higher than the software industry's median price-to-sales ratio of 2.4 times. However, considering the company's strong recovery in the tough macroeconomic environment and AI tailwinds, it makes sense for retail investors to start a small position in this stock.
2. Lemonade
Digital-only insurance company Lemonade (LMND 1.64%) has been leveraging the power of AI, ML, and behavioral economics to streamline various activities, such as onboarding new customers; pricing, underwriting, and sale of policies; processing and settling claims within minutes; and 24/7 human-like chat-based customer support services. The company also uses AI models to accurately predict customer churn levels, and cross-sell the potential of existing customers and future claims. Currently, Lemonade's business uses around 50 machine-learning models trained on hundreds of millions of customer interactions and 160 terabytes of textured data.
With its focus on affordability, efficiency, and speed, the company is targeting the tech-savvy younger generation -- and then aims to upsell and cross-sell to this audience based on their needs across their lifecycle. To capture these opportunities, the company has built a diverse portfolio offering insurance for renters, pets, homeowners, auto, and life. The success of this strategy is apparent -- Lemonade's total customer count grew by 23% year over year to 1.86 million, and its premium per customer rose by 26% year over year to $352 in the first quarter (ending March 31, 2023).
Besides product expansion and improved monetization, Lemonade is also focusing on improving its profitability. In the first quarter, the company's in-force premium (active premiums) jumped 56% year over year to $653.3 million, while operating expenses grew by only 4.1% year over year to $96.3 million. The company's first-quarter loss ratio (the amount paid for insurance claims and adjustment expenses as a percentage of total earned premiums) of 87% is also a significant improvement from 89% in the same quarter of the prior year, despite rising inflation and increased frequency of natural disasters.
With premiums growing faster than expenses, Lemonade has managed to narrow losses to $65.8 million in the first quarter, from $74.8 million in the same quarter of the prior year. The company attributes these improvements to the increased predictive power of its datasets and the robustness of its AI models.
Lemonade's recent financial performance is testimony to the solid growth potential of the company, despite tough macros. The company is also guiding for robust long-term financial metrics. Lemonade expects in-force premium to grow annually at a compound annual growth rate of 20% and a loss ratio of 70% by 2027. These targets seem achievable if the company manages to maintain its current momentum.
Lemonade is currently trading at 4.1 times trailing-12-month sales, which is near its historically low valuation level. Given its turnaround potential and the disruptive nature of its business, Lemonade is an attractive pick for retail investors.
