Artificial intelligence (AI) and its subsectors like machine learning are set to transform the way we do business. Some companies are already leveraging these advanced technologies to carry out complex tasks instantaneously, removing the need for countless hours of human input.
But that’s just the beginning. AI offers predictive capabilities unlike any tools we’ve seen in the past, helping organizations anticipate critical failures in their equipment, software, and overall processes.
The AI industry had an estimated addressable market of $93 billion in 2021, but that’s expected to soar tenfold to $997 billion annually by 2028. These five stocks can help you ride that explosive AI industry growth and turn it into stock price growth.
C3.ai ( AI 7.50% ) is a first-of-its-kind enterprise AI company. It sells both ready-made and custom AI applications to companies that want to access the benefits of the technology, but may not have the expertise to build it from scratch. It currently serves 14 different industries including oil and gas, financial services, manufacturing, and healthcare.
Companies in the oil and gas industry, for example, use C3.ai’s applications to predict costly equipment failures, preventing catastrophic production shutdowns. Additionally, they use it to improve efficiency and reduce carbon emissions. Oil giant Shell currently monitors over 10,000 devices and 23 large-scale assets using C3.ai, making 1.3 trillion predictions per month.
The company just signed a blockbuster deal with the U.S. Department of Defense worth $500 million over five years, and also has expansive collaborative agreements with tech giants like Microsoft and Alphabet‘s ( GOOG 0.92% )( GOOGL 0.74% ) Google to build advanced artificial intelligence applications.
C3.ai currently trades at a market valuation of just $2.2 billion, with over $1 billion in cash and short-term investments on its balance sheet, meaning investors value its core AI business at just $1 billion. That’s despite $252 million in estimated revenue in fiscal 2022, with $469 million in remaining performance obligations as of the recent fiscal third quarter, a metric that jumped 90% year over year. This stock is looking cheap, and its diverse customer base makes it a great way to play the future of the AI industry.
The consumer lending business hasn’t changed much in recent decades, with most banks still relying on the 30-year-old FICO scoring system to assess potential borrowers, which only looks at a handful of key metrics to determine creditworthiness.
Upstart Holdings ( UPST 11.10% ) is shaking things up, leveraging artificial intelligence to examine over 1,600 data points instead, generating a more accurate representation of the borrower and delivering an instant decision 70% of the time. Upstart says its algorithm has resulted in 75% fewer defaults for the same rate of approvals, compared to the traditional method of assessment.
The company started out in unsecured personal loans, but has expanded rapidly into automotive lending. At the end of 2021, the number of car dealerships using Upstart’s two-in-one sales and loan origination platform totaled 410, representing 269% growth compared to the end of 2020. The company’s revenue soared by 264% for the year to $849 million, with $2.37 in earnings per share. That’s right — this high-growth artificial intelligence company is also profitable.
Upstart is such an attractive proposition that one Wall Street analyst at Citigroup thinks its stock could soar by 198% to $350 per share.
The next artificial intelligence growth stock investors should buy now and hold is Splunk ( SPLK -0.26% ). It’s a machine learning powerhouse that serves 92 of the Fortune 100 companies, highlighting the rising demand for advanced technology across all industries.
One of Splunk’s customers, Domino’s Pizza, uses machine learning to monitor over 15 digital sales channels, harvesting and analyzing data in real-time. Splunk delivers insights based on that information to predict problems and help make rapid improvements in a live setting. Similarly, carmaker Honda leverages Splunk’s insights to cut its Alabama facility’s time-to-repair metric by 70%, preventing costly shutdowns thanks to the platform’s predictive analytics.
Splunk is in the midst of a transition in its business. It’s focusing on offering its services in the cloud, making them far more accessible, and it’s driving a surge in revenue. In the company’s fiscal year 2022 that just ended, cloud-based sales grew by 70%, compared to overall sales which grew 19%. Splunk’s cloud revenue of $943 million also expanded to become 35% of the total $2.67 billion revenue base, compared to just 24% in the prior year.
Splunk is also attracting more large customers. In fiscal 2022, it had 675 clients spending $1 million or more annually, up 32% compared to fiscal 2021.
A new CEO who brings experience in software-as-a-service (SaaS) revenue models has also joined the company, which will help Splunk transition into its next phase of growth.
Alphabet’s Google is a household name, and you might have accessed this very article through its search engine. But that’s why it’s on this list — artificial intelligence is at the core of Google’s ability to produce the most accurate results for internet users.
Search isn’t just about answering queries, but deciphering what a searcher actually means when they enter a phrase into Google. The company’s language model is capable of working through 680 million parameters in just 3 milliseconds when a spelling or grammatical error is made by the user, to offer a potentially more accurate search term.
But Google’s artificial intelligence presence expands even beyond that. It’s helping its customers build the technology through a suite of cloud-based tools, including pre-trained machine learning models that can reduce the amount of programming work required by up to 80%. It provides developers with a huge head start when creating models for data analysis, image classification, and video discovery, for example.
Alphabet is a $1.7 trillion company, with revenue that topped $257 billion in 2021, representing 41% growth over 2020. Of that, $19.2 billion was generated by Google’s cloud business, which hosts its artificial intelligence segment for customers, and that grew a faster 47% for the year.
With numbers like that, this tech behemoth is worthy of any portfolio in the long run.
Lemonade ( LMND 11.07% ) is leveraging AI to drastically overhaul the customer experience in the insurance industry, and so far it has succeeded in attracting over 1.4 million customers, many of whom have switched from Lemonade’s much larger competitors.
Artificial intelligence is at the company’s core, powering its online bot, Maya, that can deliver an insurance quote in under 90 seconds without human input. But claims tend to be the greatest source of frustration for customers, and Maya has that covered too, with the ability to assess and pay claims out in as little as three minutes.
Lemonade operates in five insurance categories, with the largest opportunity being car insurance. It entered that market in 2021, acquiring fellow AI-powered insurer MetroMile along the way, absorbing 49 U.S. state licenses and a decade worth of useful data.
Investing in Lemonade carries risks because it’s still building the foundations of its business. Its stock price has collapsed 82% amid the broader tech sell-off, but that might be an opportunity to take a long-term position. While Lemonade lost a hefty $246 million in 2021, the car insurance market could be a $316 billion opportunity in 2022 alone, so given enough time, the company could do exceptionally well.
In fact, Wall Street firm JMP Securities thinks Lemonade stock could soar by 357% to $95 a share.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.