The artificial intelligence (AI) boom has been going on for quite some time, and stocks like Nvidia, Microsoft, and other megacap tech companies have been the most notable winners so far. But that doesn't mean these obvious AI plays are the only way to invest.
AI technology has implications that could impact industries that might not seem so obvious, and there are some behind-the-scenes AI players that investors may want to take a closer look at. Here are two stocks in particular that could be big winners as AI evolves over the next several years, and why they could be worth a look today.
Disrupting insurance with AI technology
Insurance disruptor Lemonade (LMND +2.54%) leverages AI technology to improve the consumer experience, optimize its claims process, and generally make buying and using insurance far more pleasant than ever before. With over 2 million customers, it appears the product is resonating with those who need renters insurance, homeowners insurance, life insurance, pet insurance, and auto insurance. And AI could continue to improve risk assessment and other parts of the business as the technology evolves.
NYSE: LMND
Key Data Points
Lemonade's stock is down by more than 90% since its early 2021 peak, as the growth-at-all-costs strategy the company had been using didn't seem appealing to investors once rates start to rise and virtually free access to capital dried up. However, the business's recent results are promising, and Lemonade looks rather attractive at a valuation of just $1.25 billion (with $927 million of cash on its balance sheet).
The business continues to grow impressively, with 89% growth in in-force premiums over the past two years and an 88% customer retention rate. But now Lemonade has a clear path to profitability, which simply wasn't the case a couple of years ago. In the most recent quarter, Lemonade's loss ratio improved by eight full percentage points year over year, and management expects to achieve positive net cash flow in 2025. If the company can achieve this while continuing its growth trajectory, it could be a big winner for patient investors.
A behind-the-scenes AI play
Cadence Design Systems (CDNS +0.70%) is a less-obvious AI play than the chipmakers and consumer electronics manufacturers that get much of the attention. But those companies couldn't do what they do without Cadence's help.
Specifically, Cadence is the leader in the software that is used in semiconductor manufacturing (known as electronic design automation, or EDA, software). Companies like Apple and Nvidia -- both of whom are Cadence customers -- rely on complex software that allows them to turn their visions into actual designs that can be made.
There's a lot to like about Cadence. Most of the software company's revenue is recurring in nature (software subscriptions), and the business itself is highly profitable. To put it mildly, an 89% gross margin and 26% net margin is a bit of a rarity, even among software companies.
As AI technology evolves, chipmakers will need to use increasingly complex designs, which should create long-tailed demand for EDA software. In fact, the EDA software market is expected to roughly double over the next decade, which means Cadence should be a big winner.
Expect a bumpy ride along the way
While there's a lot to like about both of these stocks, neither is what I would consider a low-risk investment. Lemonade is a "cheap stock" by most metrics, but has a lot to prove. And while Cadence is a proven winner, it trades for more than 50 times forward earnings, so there's clearly a lot of future success priced in.
