Nvidia has been the talk of the town since generative artificial intelligence (AI) burst onto the scene last year with the arrival of OpenAI’s ChatGPT. Since then, almost every tech titan has made plans to develop their own version of ChatGPT or another generative AI service.
But investing in Nvidia or even one of the tech giants isn’t the only way to capitalize on the AI trend. There are many smaller niche companies that are starting to disrupt traditional models in every sector. The Trade Bureau (NASDAQ: TTD), Lemonade (NYSE:LMND)And Pagaya Technologies (NASDAQ:PGY) are three AI-powered stocks that could go parabolic.
1. The Trade Desk: simplify advertising
AI may be the most exciting and hyped trend in the market right now, but it’s not the only one. Advertising is also making a big impression these days because it intersects with new technology. The Trade Desk brings all these trends together in an incredibly fast-growing platform.
The Trade Desk’s activities are simple yet powerful. It offers an AI-powered marketplace that connects ad buyers and publishers. It calls itself ‘an enabler, not a disruptor’.
Those are the basics of it, which highlights why the formula is so powerful. It harnesses the power of AI to take what is otherwise a complex, multi-step process and distills it into an easy-to-use system that delivers real results.
Buyers include players such as advertising agencies and direct advertisers, and publishers include a range of sellers from print to social media and streaming. It is a digital business that uses technology to conduct transactions even if the publisher is not a digital medium such as a print newspaper.
AI is a key part of the model because The Trade Desk uses a huge amount of data to place ads in the most results-oriented places, which can be determined in seconds. It also offers highly detailed reporting, with 200 performance measures and 300 measurable variables.
The Trade Desk has shown robust growth and increasing profits. Sales increased by 23% year-on-year in 2023, despite inflation. Moreover, it is still in the early stages of its game and has an opportunity of $900 billion in global ad spend. As advertising evolves with technological developments, the company has years of growth ahead of it.
2. Lemonade: Disrupting Insurance
Lemonade definitely calls itself a disruptor. It was created to shake up the insurance industry and provide an improved experience for legacy operators. The insurance industry is an industry ripe for AI disruption because it is all based on data and still functions largely as it did a century ago (and longer).
Lemonade works differently in a few ways. It onboards customers via chatbots and approves claims digitally, often within seconds. It is a registered B-corp and gives policyholders the option to donate the remaining money to charity.
Most importantly, it is built on a digital substrate and is made to manage a multi-process system. The infrastructure connects all the components so that they flow seamlessly together, rather than relying on human intervention to move the process from one step to the next. For customers, this results in faster service that is often digital.
It also expects its models to become more accurate over time — so much more accurate that it will catch up and eventually surpass older models. For a number of reasons, that hasn’t happened yet. The biggest one is that it’s still very young and doesn’t yet have the decades of data that older companies do. It also factors in its own high costs in its profitability algorithms, and since it is still in rollout mode, they are high.
While many investors believe Lemonade is taking too long to make progress, management is confident in the AI-powered model and how it will change insurance. So far, it is proving popular with the target group of young customers.
The number of customers increased by 12% year-on-year in the first quarter of 2024, and the average premium per customer increased by 7%. That is the result of Lemonade’s upselling and cross-selling strategy. The company’s stock may be risky right now, but if and when Lemonade’s progress accelerates, the stock could skyrocket.
3. Pagaya: a better credit evaluation model
Pagaya operates an AI-powered credit evaluation platform that helps banks and financial institutions more accurately identify and minimize risk, while providing more opportunities for effective lending. It works with many top brands and has a strong pipeline of new customers that it regularly onboards.
The company recently entered into a partnership with American bank and has six major lenders lined up to join the platform. It is also in talks with other top banks that could generate years of high growth.
A key part of the model is that it sells the loans it approves to institutional lenders as asset-backed securities (ABS). It obtains financing for its loans from the lenders before disbursing them, which provides ample liquidity and opportunity.
Pagaya is reporting phenomenal growth, which is especially impressive considering the high interest rates that have crushed many lenders. Revenue and network volume both rose 31% in the first quarter of 2024, and the company raised $1.9 billion in funding, including from 18 new sources in its funnel.
Pagaya is not yet profitable, but it is moving in the right direction. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) turned positive in the first quarter compared to a loss last year in the same period, and management increased its projection for adjusted EBITDA by $10 million after some cost efficiency measures.
Pagaya is not a stock for risk averse, but it has a lot of potential and could be a candidate for excellent growth opportunities.
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Jennifer Saibil holds positions in Lemonade. The Motley Fool holds and recommends positions in Lemonade, Nvidia, The Trade Desk, and US Bancorp. The Motley Fool recommends Pagaya Technologies. The Motley Fool has a disclosure policy.
3 Artificial Intelligence (AI) Stocks That Could Go Parabolic was originally published by The Motley Fool
