Galaxy Digital CEO Mike Novogratz sees “a tremendous global demand for bitcoin,” emphasizing: “This is probably the first time in the history of bitcoin that we have true price discovery.” Noting that there is “a new army of buyers” and there is also “an army of salespeople,” he expects the price of bitcoin to be […]
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Artificial intelligence (AI) took the world by storm last year and has investors pumped up for how it can change everything. OpenAI’s ChatGPT (owned by Microsoft) and Google’s Bard (owned by Alphabet) were released almost a year ago and provided an early glimpse of how AI can shape the future. Wedbush analyst Dan Ives has called AI the fourth industrial revolution and said the technology will transform the tech space over the next two to three decades.
While AI can change life as we know it, it’s still in the early stages of deployment as companies fine-tune their models. With that said, three AI stocks with tremendous long-term potential are Upstart Holdings (UPST -2.09%), Lemonade (LMND -0.36%), and Digital Realty (DLR -0.72%). Before buying, here’s what you should know about these companies’ AI opportunities and possible risks.
Image source: Getty Images.
Upstart’s goal is to ensure the lending system is fair and open to everyone. One pain point it aims to solve is providing people previously shut out of the financial system with borrowing opportunities.
The company believes that FICO credit scores designed by Fair Isaac in 1989 fail to identify risk accurately because of their simple rules-based systems that only consider a limited set of variables. To solve this problem, Upstart utilizes AI to evaluate 1,500 variables and over 44 million repayment events to assess customer risk more accurately, allowing it to approve more loans at lower interest rates.
Investors must remember that Upstart operates in a highly cyclical consumer lending market. Over the past couple of years, demand for consumer loans by both consumers and banks has become constrained due to the higher interest rate environment. Not only that, but delinquencies on consumer loans are slowly ticking higher, and Upstart’s lending models could face a big test in the near term.
The company has expanded its model to chase a $3.6 trillion lending market opportunity across personal, automotive, home, and small business lending. According to a report by Allied Market Research, the global personal lending market alone could balloon to $719 billion by 2030 — a 32% growth rate annually. If Upstart’s models can ride out these near-term headwinds and prove they perform better than legacy lending models, its long-term potential is staggering.
Lemonade aims to streamline insurance with its AI models, from shopping for policies to processing claims. The company leverages AI to create personalized quotes, reduce customer onboarding time, and expedite customer claims.
The AI-powered insurance company is going through growing pains right now. In recent years, it has expanded from renters’ insurance into homeowners, pet, life, and automotive insurance. The company has achieved impressive growth, but that has come at the cost of higher losses on its policies and it continues to be a money-losing operation.
It had done a good job improving its net loss ratio, which is the ratio of losses plus adjustment expenses, minus amounts paid to reinsurers, to its net premiums collected. However, it must continue dialing in its models as it gathers more data and adjust its premiums accordingly.
According to a report by Global Market Insights, the property and casualty market is expected to grow 5.5% through 2032. If Lemonade can achieve consistently profitable policies, its growth, coupled with industry tailwinds, could power excellent long-term growth for the company.
Digital Realty differs from Upstart and Lemonade because it is a more stable business that caters to companies creating AI products. As a real estate investment trust (REIT), Digital Realty provides companies with colocation, interconnection, cloud services, and other solutions. The company has 316 data centers across 25 countries, focusing on regions with major internet and data communication hubs.
The company benefits from the growing demand for data centers in the ever-expanding digital economy. As the amount of data grows exponentially and AI becomes more prevalent, companies will need more data centers to keep up with this growth. According to a study by McKinsey & Company, demand for data centers will grow by 10% annually through 2030 — putting Digital Realty in an excellent position to capitalize long term.
Digital Realty is a more established business, and the runway for growth is solid. As demand for data centers grows, Digital Realty should grow with it.
Upstart and Lemonade, on the other hand, face a little more risk in the near term. These companies will need time and more data points across different economic environments to dial in their models, and the stocks will likely continue to experience volatile moves as they figure things out.
Investors should understand these are higher-risk stocks, and consider the risk-to-reward ratio to decide if they are appropriate. With that said, if things go right, the long-term possibilities for these AI-driven companies are excellent.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Courtney Carlsen has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet, Digital Realty Trust, Lemonade, Microsoft, and Upstart. The Motley Fool has a disclosure policy.
The space business and public markets are not, perhaps, a match made in heaven. Consider the much-anticipated Starlink IPO. Elon Musk’s SpaceX is the most valuable private company in the U.S., and its largest revenue driver by far is Starlink, which offers broadband connections around the globe via a constellation of low-Earth orbit satellites.
But Musk is in no hurry to spin off Starlink, despite excitement over the idea. A big reason why? The advantages of being a private company versus a public one.
“At SpaceX, we never think about the quarter. We never think about it, and we don’t think about the stock price,” Musk said this week during a Spaces conversation hosted by ARK Investment Management CEO Cathie Wood.
As he knows from leading Tesla, there’s “immense pressure on a public company to not have a bad quarter. So this can actually result in a less efficient operation, where you’re going to great lengths at the end of a quarter to not disappoint people.”
Asked if he can better take appropriate risks with SpaceX than Tesla because the former is private, Musk replied, “Absolutely.”
SpaceX has quickly become the dominant launch provider, and Starlink is well ahead of its future rivals, notably Amazon’s Project Kuiper. The company has started talks to sell insider shares at a price that puts its valuation at close to $180 billion, Bloomberg reported on Dec. 12.
Speculation on the timing of a Starlink spinoff IPO now ranges from late 2024 to 2027, though last month Musk denied that it would happen next year. In January, venture capitalist Chamath Palihapitiya predicted that Starlink would go public this year and that its valuation would “be at least half of SpaceX’s current private worth,” which at the time was about $150 billion.
Starlink revenue surged from $222 million in 2021 to $1.4 billion last year, the Wall Street Journal reported in September. But that’s low considering that eight years ago SpaceX projected $12 billion in revenue in 2022. Last month, Musk announced that Starlink had achieved break-even cash flow.
Starlink has more than 5,000 satellites in operation and the service has surpassed 2 million active users, according to SpaceX; meanwhile, the popular retailer Costco recently began selling its receivers.
But, Musk said this week, “I don’t think it’s worth going public until you have maybe an extremely stable and predictable revenue stream. At that point, going public is less of an issue because you’re just not going to have these big gyrations.”
In the meantime, Musk has little problem luring venture capitalists to invest in SpaceX given his track record, and he welcomes them. “If others are prepared to invest at a particular value…it’s sort of an outside assessment of the value of the company,” noted the world’s richest man.
Getting satellites into space, of course, is wildly expensive, and the payoff can take some time. Ashlee Vance, who wrote a 2017 book about Musk, told the billionaire earlier this year that he sometimes questions whether the Starlink business case makes sense given the “incredible amount of money” spent on something that “may or may not work.” He asked Musk if he also had doubts.
“The business case is not subjective, it is objective,” Musk replied. “If you can provide a compelling internet connection, where the quality of the product and the price are competitive with terrestrial options—or often there are simply no terrestrial options—then you obviously have a business.”
SpaceX being private also spares it from analysts’ influence, Musk added this week. One of the challenges of public markets, he said, is that “a lot of the analysts following companies have a time horizon that is maybe only a year or two…they do not care about what your long-term outcome will be because their career is dependent on how you do in the short term.”
At Tesla, “we feel like we have a sort of moral obligation to not have a bad quarter and disappoint people,” he said, adding that he’s often spent New Year’s Eve at delivery centers until midnight.
He complained that the “legal burden of being public is also way too high. So if you’re public, you’re just going to be sued nonstop by these class-action law firms…the plaintiff is simply a puppet, but the media never mentions this…That drives me crazy. It’s constantly happening.”
Musk acknowledged the advantages of Tesla going public, the most obvious being the greater capital availability. It also helped the carmaker clean up its capital structure, which was “overly complex as a private company,” he added.
But, he said, it’s “been a tremendous distraction as well on the downside.”
At SpaceX, by contrast, Musk and company have largely floated above such earthly distractions.
This story was originally featured on Fortune.com