Investors have embraced artificial intelligence (AI) as the next big thing. It stands out from other hyped-up trends and fads because it has incredible real-world implications that are already changing how we shop, do business, and more.
There are multiple ways to invest in the future of AI. You can invest in stocks that are already proven AI powerhouses, like Amazon or Nvidia, or an AI-focused exchange-traded fund (ETF) like the Global X Robotics & Artificial Intelligence ETF. Or, you could find emerging, niche AI stocks that could go parabolic. Oddity Tech (ODD 0.95%), Pagaya Technologies (PGY +3.34%), and The Trade Desk (TTD 0.41%) are three that fit the bill.
1. Oddity: AI in an unexpected industry
You wouldn't be able to guess from its name, but Oddity sells makeup and skincare under the brands Il Makiage and SpoiledChild. It uses AI and other technology in a number of ways that transform the traditional ways people purchase these products.
It uses machine learning to drive its PowerMatch system, which shoppers can use to identify precise colors and skincare formulas with cameras on their smartphones. Its Oddity Labs segment, which creates skincare, uses AI for molecular discovery to develop formulas that meet customer needs.
NASDAQ: ODD
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These features give it a leg up on competitors that use the standard selling methods. Its model is all-digital, only direct-to-consumer, data-centric, and vertically stacked, compared to competitors that sell wholesale, offline, and have a horizontal structure. It sees a global addressable market of $600 billion in beauty and wellness categories, and it's growing much faster than other beauty companies.
It has been reporting high revenue growth, with a 57% year-over-year increase in 2023, exceeding guidance. Even better, it's been profitable since going public last year. Gross margin was 70.4% in 2023, and earnings per share (EPS) of $1.31 also surpassed expectations. Management is guiding for revenue growth of 23% in 2024 and EPS to reach about $1.52.
There's significant opportunity for Oddity to capture more market share as consumers go digital with more confidence, and it's getting ready to launch new brands in other beauty and wellness categories to expand its market. It could skyrocket over the next few years.
2. Pagaya: AI for a better financial future
Pagaya operates a double-sided platform that approves loans and helps financial companies make better credit decisions using AI. It works with top names including Visa, SoFi Technologies, and Ally Financial, and it recently signed a deal with U.S. Bancorp.
Right now, this is a tough business given the high interest rate background. Creditors are being more careful in this environment since defaults rise, and fewer loans are approved under these circumstances. Despite that, Pagaya's business is growing.
The other side of its model is that it sells its loans to institutional investors as asset-backed securities (ABS), and it was the top personal loan ABS issuer in the U.S. in 2023. It works with more than 100 funding partners, and it gets all of its funding up-front. It raised $6.6 billion last year.
NASDAQ: PGY
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Network volume increased 33% year over year in the 2023 fourth quarter and exceeded expectations, and revenue was up 13% to $218 million. Revenue from fees less production costs (FRLPC), its favored profitability metric, increased 42% to $76 million.
This model could be a game changer, and more partners are likely to switch over to Pagaya's platform over the next few years. Management said it has a strong pipeline of potential clients, and its goal is to sign two to four large lending partners annually.
Pagaya is a recent initial public offering stock (IPO), and it's just getting started in disrupting a massive industry. It could explode over the next few years.
3. The Trade Desk: AI for one of the hottest growth industries
The Trade Desk works with advertisers to place ads, and AI is an important part of getting the right ads to the right viewers. In the past, advertisers used limited metrics or evidence to confirm where their ideal viewers and customers consumed content, but the ability to use a data-centric approach speeds up the process with instant results that come with pinpoint accuracy.
Even though The Trade Desk has been around for a few years and went public in 2016, in some ways, it's just getting started. Advertising, especially driven by AI, is an incredible growth industry right now. And because advertisers were negatively impacted by inflation, it's on the rebound now, with incredible prospects.
NASDAQ: TTD
Key Data Points
Advertising is also moving to digital, with all kinds of content, including social media, periodicals, and ad-supported streaming networks all online. Even advertising outside of on digital channels is transacting digitally, and The Trade Desk is well positioned to benefit from this shift. It sees a massive addressable market of $830 billion in global ad spend, and it's suited specifically for this moment.
The Trade Desk's revenue increased 23% year over year in 2023, and EPS increased from $0.11 last year to $0.32 this year. It has maintained amazing customer retention rates of 95% for the past 10 years, and it's well positioned to benefit from shifts in advertising in the coming years and to create shareholder value.
