In the current bull market, a handful of technology companies are dominating the action on Wall Street. This group became known as the "Magnificent Seven." In 2024, some of those seven names are falling behind. Today, the remaining resilient high-flyers -- Nvidia, Amazon, Meta Platforms, and Microsoft -- are referred to by some as the "Fab Four."
Now might not be the time to continue piling into those same few winners. After all, they are sitting on huge gains already. Instead, three Motley Fool contributors think you might want to consider shaking things up with a fallen angel like Tesla (TSLA 16.20%), an up-and-comer like CrowdStrike (CRWD 0.35%), or even a lottery ticket-like stock such as Lemonade (LMND -0.23%).
AI could take beleaguered Tesla stock into overdrive
Will Healy (Tesla): One way to find affordable artificial intelligence (AI) stocks is to look for companies that have fallen out of favor for other reasons than their AI connections. Tesla fits that description. The company sold about 11% fewer electric vehicles (EVs) than it built in the first quarter, and rumors that it had canceled its plans for a lower-cost Model 2 have also weighed on the stock.
Indeed, EV sales could continue to suffer in the near term. However, Tesla has recently made improvements to its AI-powered full self-driving platform, and CEO Elon Musk has announced that it will unveil its robotaxi on Aug. 8. It was primarily on the prospects inherent in this robotaxi that Cathie Wood's Ark Invest based its forecast that Tesla shares will hit $2,000 by 2027.
Ark Invest sees Tesla as a robotics stock, and believes the robotaxi will drive both sales for Tesla vehicles and the software-as-a-service platform powering the robotaxi. The investment management firm believes robotaxis will account for 67% of the company's expected enterprise value by 2027. That would dramatically transform the company as automotive sales provided 85% of its revenue in 2023.
However, considering that the target is for a more than tenfold increase in the stock price by 2027, many investors are skeptical. However, it's worth noting that in 2018, Ark Invest predicted that Tesla stock would reach $267 per share by 2021. That prediction, too, was for almost a 10-fold increase at the time -- and it came true in the 2021 bull market.
Even if Ark Invest's optimistic prediction falls short, investors have some cushion. After its recent sell-off, Tesla's P/E ratio is around 40 -- near a record low for the stock.
Ultimately, that valuation should rise, assuming a robust robotaxi platform significantly boosts revenue and earnings. Hence, Tesla could experience a massive rebound as it self-drives its way back into investor portfolios.
CrowdStrike is on the cusp of great things
Jake Lerch (CrowdStrike): CrowdStrike is a leader in cybersecurity solutions -- a field of growing importance given the seemingly endless number of cyberattacks the world continues to witness. Consider just one -- the Change Healthcare hack, which crippled claims payments for tens of thousands of healthcare providers in recent weeks. Recognizing the steep costs of falling victim to such cyberattacks, many organizations are eager to stiffen their digital defenses.
CrowdStrike, whose software relies on machine learning to monitor client networks and identify suspicious before damage is done, is gaining new clients rapidly.
In its most recent fiscal quarter (which ended on Jan. 31), CrowdStrike's revenue rose 33% year over year to $845 million. Moreover, $796 million of that, or 94%, was subscription revenue. That's important as subscription revenue is recurring, meaning it is more predictable than traditional sales, which tend to experience greater ups and downs.
In addition, CrowdStrike is making a key transition in its life cycle: It's becoming profitable. Its net income recently turned positive for the first time. The company has generated $89 million in net income over the last 12 months. What's more, free cash flow has soared to $3.81 a share. That's critical, as rising free cash flow per share is cited by many as the ultimate financial measure of success for a public company -- and is often correlated with long-term stock price gains.
CRWD Net Income (TTM) data by YCharts.
In short, CrowdStrike is the best of both worlds. It's a young company with growing free cash flow that is making the transition to consistent profitability. It's also riding a secular growth trend as more organizations upgrade and strengthen their cyber defenses in the face of increasing danger. For those reasons, it's a stock worth considering.
Lemonade's AI offers a new spin on insurance
Justin Pope (Lemonade): Insurance is an age-old industry ripe for disruption. The incumbents -- the humongous insurance companies whose names you know, the ones that do all the commercials with pro athletes, funny mascots, and recognizable spokespeople -- do use AI to analyze data. However, they still sell policies through an agent model, which has given Lemonade enough opportunity to break into the market. Lemonade uses AI chatbots to communicate with customers and process claims. These bots can complete tasks in as little as 90 seconds and get a claim paid in under three minutes. You might sit on hold longer than that, waiting to speak with an agent at a traditional insurance company.
Lemonade's app-first experience has won over many customers. Its customer count grew 12% year over year in Q4 to more than 2 million, a growth rate that suggests that some people are leaving other insurance providers for Lemonade. Its product line isn't yet as fully fleshed out as those of its longer-established competitors, but customers can get renters, homeowners, car, pet, and life insurance policies from it.
Insurance companies make their profits when they pay out less in total claims than customers pay in total premiums. Lemonade isn't profitable yet. However, its non-GAAP EBITDA losses in Q4 were $29 million, a 44% smaller loss than it had in the prior-year period. Importantly, Lemonade has $945 million in cash on the books, and it generated positive cash flow in the back half of last year. That's a good sign that it is financially stable.
Lemonade is a risky investment at this point -- for the company to prosper, it still must continue to pick up customers and find a way to turn profitable. However, more risk offers more opportunity for higher rewards, and Lemonade, with its $1.2 billion market cap, could be a portfolio-changer if it can evolve into a major player in insurance.
