Is artificial intelligence (AI) just a buzzword? Or is it really the next wave of useful technology? It's already changing many applications in just about every industry, so I think it's safe to say that it's more than just hype. If you're only hearing about it now, chances are that you already missed many early-stage opportunities in AI. The hottest stock in 2023 was arguably Nvidia, one of the main companies producing chips for AI. It gained about 230% last year, and several thousand percent more leading up to that moment.
But that doesn't mean you can't still benefit from companies creating new opportunities in AI and adopting more AI in their operations. Block (SQ 2.32%) and Lemonade (LMND 1.64%) are two companies using AI to shape their businesses, and 2024 could be a big year for both of them.
1. Block: Getting back to its core activities, but better
Block was one of the original fintech companies that swept to prominence when digital payments began to reshape the financial industry. It was hailed as a real change agent, and it has become a Cathie Wood favorite. The company's Cash App financial services app is consistently top-rated among consumers, and its Square seller's business keeps growing.
Block has a knack for understanding its customers and developing easy-to-use solutions that meet demand. Its stock had reflected its high growth and investor enthusiasm, but as with many growth stocks in the most recent bull market, the valuation became astronomical. Around that time, the company changed its name from Square to Block, bringing a strong focus on blockchain technology and Bitcoin. But as it veered off into new directions, investor became disillusioned. The stock stumbled and is now about 74% off its highs.
Management has recently returned to focusing on what it does best, which is innovating in payments and small business solutions. As part of that, it has launched foundational AI services for its seller's business that take it up a few notches. These are tools like generative AI, which clients can use to create marketing campaigns, images, and more, as well as automate processes to free up time. This is the right move for Block. Its seller's solutions is the smaller of its two ecosystems, but it's a steady growth driver, and these are important upgrades that keep it in a dominant position.
Management is also seeking to leverage AI in shaping its own business. Part of what has disappointed investors is that despite continued growth, Block remains unprofitable. It has the brand and products to be a top company, but it's been struggling with keeping costs down. It says it's committed to becoming more efficient and sees AI as a gateway toward making that happen.
Block stock gained 26% in 2023, about in line with the broader stock market. It's only a buy for risk-tolerant investors, but this could be the year it finally takes off.
2. Lemonade: Disrupting traditional insurance
Lemonade was also much-hyped stock that hasn't impressed investors -- yet. It's been reporting phenomenal growth since inception, but it's taking a very long road toward profitability.
Lemonade sells insurance products on a digital platform, and it uses AI to inform everything it does, from evaluating risk to onboarding customers to verifying claims. It's supposed to be more efficient than using humans for all of these tasks, but between launching new products, acquisitions, marketing, and technology investments, it's nowhere near net profitability. Its loss ratio, which looks at how much of each dollar in premiums is paid out in claims and related costs, has also been higher than investors anticipated.
Management isn't worried about this, and for the most part, it says it's going according to plan. Those plans include higher loss ratios as the young company rolls out new products in new markets and gathers data to improve its machine learning algorithms. It insists that it has a structural advantage in its digital systems that will prove much more efficient than companies with legacy operations.
It has demonstrated that its older insurance products do have better loss ratios, and now that it's rolled out a large collection of products, it's starting to focus on improving the loss ratio and profitability. It has revised its forecast to becoming cash-flow-positive in early 2025, sooner than expected, and it expects to post positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2026. In the meantime, it continues to onboard new customers and increaser revenue and premiums at a quick pace.
Lemonade stock is sensitive to the news cycle, and it typically reacts to positive or negative earnings results with extreme moves. If profitability improves, expect Lemonade stock to reflect investor optimism. It ended the year with a 23% increase, but it's still down 90% from its highs. You can lock in the price now and reap the rewards over time.
