There are two ways to approach the artificial intelligence (AI) revolution.

With a conservative approach, an investor can buy shares in established tech giants like Microsoft or Nvidia, both of which are investing billions of dollars in their AI products and services. Both represent blue-chip bets on AI, but the potential upside in their stock prices might be unappealing to investors with a higher risk appetite. 

Or if they have a greater tolerance for risk, investors can buy shares in smaller companies developing AI that are still trying to achieve scale and haven't built profitable businesses just yet. Investing in these companies can be incredibly risky; if they fail to eventually generate cash, they could deal substantial losses to investors. On the flip side, if they're successful, investors could multiply their money by several times.

So far, life in the public markets has been challenging for small AI companies like C3.ai (AI 3.85%), Lemonade (LMND 2.78%), and Upstart (UPST 8.89%). Their valuations have crashed by as much as 92% after enjoying an initial bout of optimism from investors.

However, all three companies are making positive progress toward building a sustainable business, and the risk-reward proposition might be very attractive to investors with a long-term time horizon (and a stomach for volatility along the way). That's why, if each company executes, there could be significant gains on the table for investors. 

1. C3.ai: Down 82% from its all-time high

Believe it or not, C3.ai is actually a pioneer of enterprise artificial intelligence. It was founded in 2009, and it was one of the first companies offering AI tools and services to businesses. Today, its product portfolio spans 40 ready-made AI applications for industries like banking, retail, energy, and beyond. 

C3.ai CEO Thomas Siebel describes the AI opportunity as a "megamarket event" similar to the internet and the smartphone. The company already serves some of the largest organizations in the world, including fossil fuel giant Shell, which uses C3.ai's applications to monitor over 20,000 items of equipment. They collect data in a live environment to predict potential failures and to help reduce carbon emissions. 

But that's just one use-case example. To truly understand the quality of C3.ai's AI technology, investors need only look to the company's partnerships. It now sells applications jointly with the world's largest providers of cloud services, including Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. Why? Because C3.ai is capable of accelerating tasks like software development for customers of those cloud platforms.

C3.ai stock listed publicly in December 2020 and quickly logged an all-time high of $161, mainly based on investors' enthusiasm over the opportunity to own one of the first-ever pure-play AI companies. However, C3.ai's revenue growth hasn't yet lived up to the hype, and its stock is down 82% from that lofty level. Startups -- especially those in new, emerging markets -- tend to generate lumpy financial results. 

But there is potential for a strong recovery on the horizon. The company is currently shifting from a subscription-based revenue model to a consumption-based model, which will enable it to onboard customers far more quickly. Based on C3.ai's financial projections, this move should lead to a rapid acceleration in growth roughly 12 months from now. It won't eliminate every risk the company faces, but it's a positive step on the road to building a sustainable business, and buying its stock ahead of that growth upswing might be a great move. 

2. Lemonade: Down 92% from its all-time high

Lemonade is using AI for a very specific purpose: To disrupt the age-old insurance industry. Nobody enjoys dealing with traditional insurance companies, especially when it's time to make a claim, so Lemonade has developed AI-powered bots that can handle the process quickly and easily across its five insurance markets. They include homeowners' insurance, renters' insurance, life insurance, pet insurance, and car insurance. 

Its AI chatbot, Maya, is accessible through the Lemonade website, and it can write insurance quotes in under 90 seconds. A separate bot called AI Jim can pay claims in three minutes or less without human intervention, which makes the process far less stressful for customers. Plus, Lemonade has woven AI throughout its operations, so it's doing far more than just reshaping the customer experience for its 1.9 million policyholders. 

It has built AI models to help price insurance premiums more accurately by predicting which customers are likely to buy multiple policies, which customers are likely to leave, and which customers are most likely to make a claim. Additionally, Lemonade's models also identify under and overperforming geographic markets so the company can pivot its marketing spending quickly to maximize revenue. 

Lemonade stock is down 92% from the all-time high price it set during the tech frenzy of 2021 when investors grew way too optimistic about the company's growth prospects. However, that might be a long-term opportunity for investors who come in now and pick up the pieces. Why? Because at the end of the second quarter of 2023 (ended June 30), Lemonade's in-force premium was $686 million, which is a drop in the bucket considering the U.S. car insurance industry alone was worth $348 billion last year. The company's addressable market is huge.

Plus, Lemonade has more than doubled its revenue in the first six months of 2023 (year over year), so it's certainly capable of delivering powerful growth. But the company is still losing money, and it could eventually require another capital injection, which might be dilutive to investors. But given the steep discount in Lemonade stock from its all-time high, the risk-reward proposition does look quite attractive

3. Upstart: Down 92% from its all-time high

Like Lemonade, Upstart is also using AI to disrupt an old, entrenched industry. It's trying to transform the lending business by offering an alternative to Fair Isaac's FICO credit scoring system, which has been relied upon by banks for over three decades. See, FICO only considers five core metrics when assessing a potential borrower, whereas Upstart says its AI algorithm can analyze more than 1,600, which means it can (theoretically) price credit risk more accurately. 

Based on the company's internal studies, that increase in accuracy has led to 43% more loan approvals at an interest rate that is 43% lower on average compared to traditional lending processes. Plus, because the analysis of each potential borrower is conducted using AI, Upstart can deliver a fully automated, instant loan approval 87% of the time. That's a significant potential cost saver for the company's bank partners. 

Upstart suffered on multiple fronts during 2022. Rising interest rates quelled demand for loans among consumers, and the company's funding partners weren't sure if its AI models would hold up during turbulent economic conditions. As a result, Upstart's revenue growth stalled, and investors sent its stock price plunging. As of this writing, it's trading 92% below its all-time high.

But it appears most of those concerns have since been resolved, following substantial amounts of data published by Upstart proving its models still outperform traditional lending methods. At the end of the second quarter of 2023 (ended June 30), the company had 100 lending partners, which was up from 71 in the year-ago period. It proves there is a growing demand for an AI-based approach to lending. 

In another vote of confidence back in May, Upstart secured a $4 billion investment from asset manager Castlelake, which will go toward funding new loans. 

It might take years for Upstart stock to reclaim its all-time high. But consider this: The company has only originated $34 billion worth of loans since its inception, and its addressable opportunity in its two core markets -- personal loans and car loans -- is worth a whopping $925 billion each year. But that runway for growth might soon grow larger because Upstart highlighted the $2.2 trillion mortgage market in its recent investor presentation, which is a market it hasn't entered yet.

Upstart is gradually emerging from the most difficult period in its history, and now might be a great time for investors to scoop up its stock for the long term.