Artificial intelligence (AI) is rapidly becoming more prevalent in today’s society, reaching into industries that many investors never would have thought. Deere & Company, for example, is bringing artificial intelligence and machine learning to tractors with a fully autonomous tractor that can plow, harvest, and plant crops without a driver.
With Deere, among other companies, it is clear that artificial intelligence is making its way into nearly every part of our world, and there are three companies you can invest in today that I think could be the best companies to capitalize on it.
Upstart Holdings (NASDAQ:UPST) is bringing AI to a very old market: loan determinations. For decades, Fair Isaac has ruled the loan determination space with its FICO score, but it is a flawed system. Every day many people are locked out of prime credit because of minor slipups, and large banks end up losing out on loans that could have made them a pretty penny. Upstart is trying to change this and offer prime credit to a broader population by using AI rather than the FICO score to determine creditworthiness.
Most large banks use just a handful of variables to determine loan worthiness, but Upstart uses thousands of variables and data from over 10 million past loan decisions to do so — making it safe to assume that Upstart is taking a closer look than its competition. In an internal study, Upstart found that its determination engine can approve 173% more consumers at the same loss rate as other banks.
The company has yet to go through a full credit cycle so it still has a lot to prove, but the early results are incredibly positive. Upstart can automatically approve 67% of determinations, which helps the company’s bottom line. In the third quarter, it had a net income of $29 million while it grew its top line by 250%.
A profitable, fast-growing company that has seen incredible success in disrupting its industry is going to demand a high valuation, and Upstart is no exception. The company trades at 17 times sales, and while that is somewhat pricy, it is much cheaper than the 60 times sales it traded at just three months ago.
Upstart has developed an AI engine that is extremely accurate today and could become a new industry standard in the next five years. With such little innovation in the space, the company could potentially rise to the top and take over the FICO score as the primary loan determination tool, and that could mean great things for investors over the next decade.
If you thought there was no more boring industry than the loan determination market, think again. Lemonade (NYSE:LMND) is disrupting one of the oldest and most boring industries in the U.S: insurance. Lemonade was one of the fastest insurance companies ever to reach 1 million customers, and that has been because its new approach to insurance which has a heavy emphasis on AI.
Lemonade uses artificial intelligence to approve customer applications and claims in minutes, and the company makes it easy to apply for a claim with just a few pictures of the situation. This painless process fueled by AI has resulted in a Net Promoter Score — which measures customer satisfaction on a scale of negative 100 to 100 — of 47. This is extremely high when compared to other insurance companies like Aflac, which has a score of negative 15.
Lemonade also has a unique business model that aligns its incentives with the customers. Lemonade only receives a flat fee from each customer instead of whatever is left from claims, getting rid of the company’s incentive to deny as many claims as possible. Additionally, the company gives the money left over to charity. This is a complete deviation from the insurance industry’s “traditional” way of doing things, but a company can flourish when its incentives are aligned with its customers. With these competitive advantages and the rate at which Lemonade is being adopted, I am excited to be a shareholder for the next decade and beyond.
Both Lemonade and Upstart are seeing incredible success, but you might want to consider a more broad-reaching investment strategy to the AI space with Nvidia (NASDAQ:NVDA). Nvidia has become an extremely sought-after chipmaker, known for its high-performance graphic processing units (GPUs) that are used heavily in the AI industry.
Owning this pick-and-shovel play would not only allow you to capture the benefits of AI, but also cloud computing, the metaverse, and many other growing industries. As a leading chipmaker in these spaces, the company has performed extremely well financially. Revenue surpassed $7 billion, growing 50% year over year, and its free cash flow grew 62% to roughly $1.3 billion in Q3.
Nobody can deny that those financials are jaw-dropping, and the company’s opportunity is theirs to lose. As an industry leader in so many futuristic industries, it should come as no surprise that the company also has a pricy valuation. The company trades at 84 times earnings, but with a business like Nvidia, it might be worth paying up for.
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.
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