These Artificial Intelligence (AI) Stocks Are Quietly Outperforming The Market

Beyond the Headlines: Two AI Stocks Quietly Outperforming the Market

Artificial intelligence has undeniably dominated the stock market narrative since the pivotal launch of ChatGPT in late 2022. This AI surge coincided with the market beginning to recover from a bear market slump, helping propel major indices like the S&P 500 to significant gains exceeding 50%.

While household names like Nvidia and Palantir have rightfully captured investor attention with their impressive performance, the AI revolution is fostering growth across a wider spectrum of companies. Savvy investors understand the value of looking beyond the obvious frontrunners to uncover hidden gems with substantial upside potential. This post delves into two such AI-driven companies that have been quietly staging remarkable comebacks and outperforming the broader market.

Upstart: Reinventing Lending with AI

Upstart, an AI-driven online lending platform, experienced a tumultuous journey since its December 2020 IPO. After an initial boom in 2021, the stock suffered a precipitous 97% decline during the subsequent bear market as rising interest rates severely impacted its core lending operations. Many investors overlooked the company, considering its model broken in the new economic environment.

However, Upstart has not only survived but thrived by strategically revamping its business. A key factor in its resurgence is the introduction of a new, more advanced AI model. This technological leap has demonstrably improved conversion rates within its lending pipeline. Furthermore, Upstart has diversified its reach, venturing into large and lucrative lending markets such as home and auto loans, expanding its addressable market significantly.

These fundamental improvements are translating into impressive financial results and a dramatic recovery in the stock price, which has surged approximately 175% over the past year. Upstart's core value proposition lies in its AI model's ability to achieve significantly better results than traditional credit scoring methods like FICO. This technological edge allows it to potentially identify creditworthy borrowers overlooked by legacy systems, opening up a vast market opportunity.

Recent financial performance highlights this turnaround. In the first quarter, Upstart reported a robust 67% increase in revenue, reaching $213 million. Loan originations saw an even stronger jump, rising 89% to $2.1 billion. The improved AI model contributed to a higher conversion rate of 19.1%, a notable increase from 14% in the same quarter last year. This operational efficiency is positively impacting the bottom line; adjusted EBITDA swung from a loss of $20 million a year ago to a profit of $43 million. Critically, the company anticipates achieving profitability on a generally accepted accounting principles (GAAP) basis within the current year, a significant milestone.

With a market capitalization currently around $6 billion, Upstart retains considerable upside potential. The credit market is enormous, and Upstart's disruptive AI technology positions it well to capture a larger share. Continued strong execution and further advancements in its AI capabilities could serve as powerful catalysts for future stock performance.

Lemonade: AI-Powered Insurance Making Strides

Lemonade, the AI-based insurance disruptor, shares a similar narrative of early excitement followed by a challenging period. After a successful IPO during the pandemic, the stock faced a sharp decline in 2022, primarily due to ongoing operating losses, slowing growth, and shifting market sentiment away from unprofitable growth stocks.

Despite these headwinds, Lemonade has engineered a significant comeback, fueled by improving operational results and a clear path towards profitability. The stock has climbed approximately 160% over the past year, with a notable surge last November following a strong earnings report and an encouraging Investor Day presentation that instilled confidence in the company's strategic direction.

Lemonade leverages AI throughout its business, from underwriting and customer acquisition to claims processing, aiming for greater efficiency and lower costs compared to traditional insurers. The company has set ambitious but achievable goals, targeting adjusted EBITDA profitability by 2026 and GAAP net income profitability by 2027. These targets signal management's focus on sustainable growth and financial discipline.

Recent performance indicates progress towards these goals. In its most recent earnings report, Lemonade reported accelerating force premium growth of 27%, reaching $1.01 billion. Its customer base also expanded significantly, growing 21% to 2.55 million. The gross loss ratio, a key metric representing the portion of premiums paid out in claims, remained steady at 73% over the last four quarters, suggesting stability in its underwriting performance.

While challenges remain, including the inherent risks of the insurance business such as large-scale natural disasters (like the California wildfires mentioned in their Q1 results), management's efforts to streamline operations and improve underwriting are yielding positive results. The commitment to profitability by 2027 provides a clear benchmark for investors.

With a current market cap of approximately $3 billion, Lemonade offers substantial potential upside. Successfully executing its plan to achieve and maintain profitability could easily lead to a significant increase in its valuation, rewarding investors who believe in its AI-driven model to revolutionize the insurance industry.

Investing Beyond the Giants

While the AI narrative often centers on the multi-billion dollar tech giants, companies like Upstart and Lemonade demonstrate that significant opportunities exist in smaller, more agile players leveraging AI to disrupt established industries. Their recent performance and clear paths towards profitability highlight their potential. While past volatility underscores the risks, the progress made in improving their business models and leveraging AI for efficiency and growth makes them compelling stocks worth considering for investors looking to diversify their exposure within the dynamic artificial intelligence landscape.