Artificial intelligence (AI) captivated investors in 2023, and they rushed to buy shares of companies developing the technology. Nvidia (NVDA 1.18%) is one of the most popular because it's the leading producer of advanced chips used to train AI, and its stock has soared a whopping 185% so far this year.
Microsoft (MSFT 0.05%) also became synonymous with AI, thanks to its sizable investments in start-ups like ChatGPT developer OpenAI. Microsoft stock has also crushed the broader market this year, and its $2.5 trillion valuation makes it the world's second-largest company.
Investors who don't own shares in Nvidia or Microsoft might feel like they've missed out, but a long list of other companies also operate in the AI space. I'll share two of them below and explain why it's not too late to buy into each of them right now.
1. DigitalOcean is breaking into cloud-based AI services
DigitalOcean (DOCN -0.94%) is a provider of cloud services that specifically caters to small and mid-sized businesses with under 500 employees. It helps them host websites, store data, and even develop software, but its product portfolio is far narrower than those of the cloud industry leaders like Amazon Web Services (AWS) and Microsoft Azure.
DigitalOcean instead competes by offering small enterprises cheap, transparent pricing, and highly personalized service, which are attributes the larger cloud providers typically can't match. But businesses of all sizes recognize the power of AI to boost productivity, reduce costs, and maximize revenue. AWS and Azure are rapidly building out their AI product portfolios, but DigitalOcean was absent in this space until recently, which placed it at risk of losing customers to its competitors.
That's why it acquired Paperspace in July, a cloud-based platform used by over 500,000 developers to build, train, and deploy AI applications. Paperspace is a great match for DigitalOcean because it also focuses on affordability and accessibility for its business customers. Its accelerated data center infrastructure runs on the latest Nvidia A100 GPU chips, and it's up to 70% cheaper to rent than comparable hardware managed by Microsoft Azure. Paperspace delivers those savings by using per-second billing with no lock-in contracts, and by operating a lean business with lower overhead costs than other providers.
DigitalOcean now has a suitable AI platform for its 616,000 business customers, particularly the 150,100 of them it classifies as "builders" and "scalers." Those two cohorts are the company's biggest spenders because they've moved beyond the pre-revenue stage most start-ups go through.
As of the recent second quarter of 2023 (ended June 30), DigitalOcean had $682 million in annual recurring revenue. But it places its opportunity in the cloud industry at $98 billion this year, and thinks it could double to $195 billion by 2026, so it has barely scratched the surface.
Plus, DigitalOcean stock currently trades 72% below its all-time high following the brutal sell-off in the technology sector last year, so this could be a great chance for investors to buy it at a discount.
2. Lemonade is transforming the insurance industry using AI
Dealing with an insurance company is never fun, especially when it's time to make a claim. The process can be long and painful during a period of your life that is already filled with stress. Lemonade (LMND -1.81%) is looking to change all of that by using AI to interact with customers, and also to price premiums with more accuracy. It operates in five insurance markets right now (and growing): renters, homeowners, pet, life, and car.
The company developed an AI model called Maya that can write an insurance quote in 90 seconds following a short online chat with a prospective customer. It has also developed an AI model called Jim that can pay claims in under three minutes with no human intervention. In fact, Jim has paid a claim in as little as two seconds, which is currently the world record!
But Lemonade's Lifetime Value 6, 7, and 8 AI models are capable of doing even more. They operate behind the scenes, predicting which customers are likely to switch insurers, which customers are likely to buy more than one Lemonade policy, and which customers are most likely to make a claim. Plus, they constantly analyze the performance of each product in each geographic market, so Lemonade immediately knows when it's time to adjust prices or change its marketing strategy.
Lemonade is still very much an early-stage company, but it's growing quickly. In the second quarter of 2023 (ended June 30), its revenue more than doubled year over year to $104 million, and its in-force premium (the value of all active policy premiums) jumped 50% to $686 million. The company isn't profitable just yet because it's still investing heavily in growth, but it just made a dramatic change to its customer acquisition strategy that should help accelerate its pathway to positive earnings.
Lemonade stock soared during the tech frenzy in 2021, but it has since declined by 90% from its all-time high as investors trim their exposure to risk in this tough economic climate. However, if you're looking for an AI company that is actually monetizing the technology with a proven business model, Lemonade stock presents a very enticing risk-reward proposition.