AI Stocks Quietly Beating the Market

AI Stocks Outperforming the Market

Since ChatGPT's debut in late 2022, artificial intelligence (AI) has been a major force in the stock market. The S&P 500 experienced a bear market due to post-pandemic conditions and rising inflation, but has since increased by over 50%. While investors recognize top AI stocks such as Nvidia and Palantir, some others have been quietly outperforming the market.

Upstart

Upstart (NASDAQ: UPST) saw significant gains after its IPO in December 2020, with the stock price soaring during the pandemic in 2021. However, the stock then fell 97% during the subsequent bear market as rising interest rates negatively impacted its lending business, as it functions as an AI-driven online lending platform. Upstart has since improved its business by implementing a more advanced AI model, leading to better conversion rates, and expanding into larger lending markets, including home and auto loans. The stock has increased by 175% over the past year. With a market cap of $6 billion, Upstart aims to disrupt the market and compete with traditional FICO scores.

Upstart's AI-based lending model reportedly achieves better results than the FICO score, and the business is experiencing rapid growth with improving profitability. In the first quarter, revenue increased 67% to $213 million, with an 89% increase in loan originations, reaching $2.1 billion. The conversion rate was 19.1%, up from 14% in the prior year's quarter. Adjusted EBITDA was $43 million, up from a loss of $20 million in the prior year's quarter. The company anticipates being profitable on a GAAP basis this year. Upstart has a significant growth opportunity in the credit market, and continued execution and technology improvements could drive further stock growth.

Lemonade

Lemonade (NYSE: LMND), the AI-based insurance company, is another AI stock on the rise. Similar to Upstart, Lemonade had a successful IPO during the pandemic but then declined in 2022 due to ongoing losses, slower growth, and shifting market sentiment. However, Lemonade has since rebounded due to improved results and a goal of achieving profitability by 2027. The stock is up 160% over the past year. The stock price increased last November following a strong earnings report and an Investor Day conference.

In its most recent earnings report, Lemonade reported a 27% acceleration in in force premium growth, reaching $1.01 billion. Total customers increased 21% to 2.55 million. The gross loss ratio over the past four quarters was 73%, meaning that 73% of revenue was used to pay claims. Lemonade anticipates being adjusted EBITDA profitable by 2026 and GAAP net income profitable by 2027. While Lemonade faces challenges, including the risk of events such as the California wildfires impacting results, efforts to streamline the business appear to be succeeding. With a market cap of $3 billion, the stock has the potential to double if Lemonade achieves its profitability goals.