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

Beyond the Giants: Two AI Stocks Staging Impressive Quiet Comebacks

The artificial intelligence (AI) revolution has undoubtedly reshaped the stock market landscape since late 2022. Following a period of market uncertainty and rising inflation, the introduction of groundbreaking AI technologies like ChatGPT coincided with a significant rally in broad market indexes, with the S&P 500 jumping more than 50%. While household names like Nvidia and Palantir have captured much of the headlines and investor attention, delivering substantial returns, a deeper dive reveals other AI-leveraging companies that have also been quietly outperforming the market. These lesser-known players present potentially compelling opportunities by applying AI in diverse sectors and executing strategic turnarounds.

Let's explore two such companies that, after facing significant challenges, are now leveraging AI to drive growth and aiming for profitability, leading to notable stock price appreciation over the past year.

Upstart's AI-Powered Lending Transformation

Upstart, an AI-driven online lending platform, experienced a meteoric rise after its December 2020 IPO, only to see its stock plummet by a staggering 97% during the subsequent bear market. The surge in interest rates severely impacted its core lending business. However, the company hasn't stood still. Upstart has undergone a significant transformation, driven by the introduction of a new, more advanced AI model. This technological improvement has led to enhanced conversion rates, making its lending process more efficient and effective.

Beyond technology improvements, Upstart has strategically expanded into larger lending markets, specifically targeting the massive home and auto loan sectors. This expansion broadens its addressable market significantly. Despite its previous struggles, Upstart has quietly staged a powerful comeback, with its stock price surging an impressive 175% over the last year. This performance demonstrates a clear benefit of their strategic adjustments and AI development.

Upstart's core value proposition lies in its AI model's ability to assess credit risk more effectively than traditional FICO scores, according to the company. This allows for potentially broader and more accurate lending decisions. With a market capitalization of $6 billion, Upstart is attempting to disrupt a vast credit market, suggesting considerable upside potential if its AI model continues to prove superior and gain wider adoption among lenders.

Recent financial results underscore this progress. In the first quarter, Upstart reported a 67% increase in revenue year-over-year, reaching $213 million. Loan originations grew by 89% to $2.1 billion. The conversion rate saw a healthy jump to 19.1% from 14% a year prior. Financially, the company has moved towards profitability, reporting $43 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a significant improvement from a $20 million loss in the same quarter last year. Management anticipates achieving profitability on a generally accepted accounting principles (GAAP) basis this year, a key milestone for investors.

For investors, Upstart represents an opportunity in a company leveraging AI to challenge established financial assessment methods. Continued execution on technology improvements and market expansion could drive further performance, offering a practical way to invest in AI disrupting traditional finance.

Lemonade's AI-Driven Journey Towards Profitability

Lemonade, the AI-based insurance company, is another example of an AI stock that saw a post-IPO peak followed by a sharp decline in 2022. Challenges included ongoing losses, slowing growth, and a shift in market sentiment away from unprofitable tech companies. However, Lemonade has also recently mounted a comeback, driven by improving business results and a clear, articulated goal of reaching profitability.

The company's strategic focus on streamlining operations and leveraging its AI capabilities appears to be paying off. Lemonade has set specific targets: adjusted EBITDA profitability by 2026 and GAAP net income profitability by 2027. These clear financial goals have resonated with investors, contributing to a 160% increase in the stock price over the past year. This significant rebound, particularly following a strong earnings report and Investor Day in late 2024, highlights investor confidence in the company's path forward.

Lemonade's recent performance shows tangible progress. In its latest earnings report, the company announced an acceleration in force premium growth, up 27% to $1.01 billion, indicating strong sales traction. The total customer base grew by 21% to 2.55 million. While challenges remain, such as managing its gross loss ratio (which stood at 73% over the last four quarters, representing the portion of revenue used to pay claims) and external risks like natural disasters, management's efforts are driving the company closer to its financial targets.

With a market capitalization of $3 billion, Lemonade presents a potentially attractive investment if it successfully executes its plan to become profitable. Meeting the 2027 GAAP net income target could be a major catalyst for further stock appreciation.

Investing in Lemonade offers exposure to AI transforming the insurance industry, focusing on efficiency and potentially lowering costs through automation and better risk assessment. Its comeback story provides a practical case study in how strategic focus and operational improvements, underpinned by technology, can change a company's trajectory.

Beyond the Obvious: Finding AI Opportunities

While the leading AI giants continue to command attention, the stories of Upstart and Lemonade illustrate that significant opportunities exist in companies applying artificial intelligence in less obvious, but equally impactful, ways. Both companies faced severe downturns but have utilized their core AI technology and strategic adjustments to engineer impressive turnarounds, reflected in their strong stock performance over the past year.

These examples provide valuable takeaways:

• AI's impact extends far beyond large tech infrastructure or foundational models; it can drive significant improvements in traditional industries like lending and insurance.
• Company turnarounds, often fueled by technological advancements and focused execution, can present substantial investment potential.
• Looking beyond the most talked-about stocks can uncover compelling opportunities with strong growth trajectories and clear paths towards profitability.

For investors interested in the AI space, exploring companies like Upstart and Lemonade offers a practical approach to diversifying exposure and potentially capturing value from businesses using AI to disrupt existing markets and improve their financial health. Their recent performance serves as demonstrable benefits of their evolving strategies. As always, thorough research is essential before making investment decisions.