Taking advantage of the ongoing advancements in artificial intelligence can benefit your portfolio in numerous ways. The excitement surrounding AI has surged over the past year, and while Wall Street can occasionally get ahead of itself, identifying the frontrunners in AI can significantly enhance your stock portfolio returns in the coming years.
You may already be familiar with ChatGPT and Google Bard, AI chatbots developed by Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), respectively. These companies seem well-positioned to take on significant roles in AI but don’t discount rising firms like Upstart (NASDAQ: UPST), SentinelOne (NYSE: S), and Lemonade (NYSE: LMND).
Microsoft
Having evolved successfully as a tech company, Microsoft started with enterprise software and introduced the cloud platform Azure just over a decade ago. The company is again shifting gears to incorporate AI into its business model. Microsoft maintains a long-standing partnership with OpenAI, the creator of ChatGPT. This AI chatbot delivers information in a language-based format rather than pages of links, as seen in search engines.
ChatGPT is being integrated into Bing Search and Azure, with Microsoft securing exclusive rights to commercialize OpenAI’s workloads through Azure. OpenAI has emerged as a leader in AI applications, amassing 100 million users shortly after launching ChatGPT. While the outcome remains uncertain, Microsoft’s exposure to OpenAI’s software applications offers a potential growth catalyst.
Alphabet
Though some argue that Alphabet’s search engine dominance is under threat due to ChatGPT and Bing, it’s a formidable challenge. Alphabet’s primary business, Google Search, dominates the global search engine market with an impressive 93% market share. Furthermore, Alphabet is developing its own ChatGPT competitor, Google Bard. While investors should always verify facts, it’s likely too early to predict Google’s downfall.
With shares down 30% from their peak, this could present an excellent opportunity to invest in one of the world’s most influential companies. Alphabet’s leading internet products, Google Search and YouTube, are the most visited sites globally. Additionally, Alphabet boasts a solid balance sheet with $100 billion in net cash. If Alphabet can develop a competitive alternative to ChatGPT and integrate it into Google, investors may regret not buying shares during this downturn.
Upstart
AI’s potential extends beyond language models. Upstart leverages AI to disrupt the financial sector by using AI to approve consumer loans, replacing the traditional credit score that banks depend on. Upstart claims its method better identifies risk, helping extend credit to minorities and other eligible borrowers whose credit scores may overlook.
However, Upstart’s stock is considerably riskier than Microsoft or Alphabet. The company has faced challenges since interest rates began rising in 2022, forcing it to hold loans it originated on its balance sheet. This has hindered growth and prompted management to seek committed funding from institutional buyers to purchase loans. Upstart’s technology appears promising, but exercise caution as the stock remains highly speculative until the business stabilizes.
SentinelOne
With data breaches costing U.S. enterprises over $9 million in damages, the demand for cybersecurity is high. SentinelOne represents the industry’s next-generation technology. Its Singularity Platform employs AI to detect and address threats autonomously, traditionally performed by human analysts or antivirus software, which can’t identify unknown threats.
SentinelOne’s revenue grew by 106% YoY in the fiscal year ending Jan. 31, 2023, indicating that it is quickly capturing market share from competitors offering outdated solutions. The company already serves some of the world’s largest corporations, including three Fortune 10 companies. Initially going public with substantial hype, SentinelOne’s stock traded at a price-to-sales (P/S) ratio as high as 106. However, after a market bubble burst in 2022, SentinelOne’s stock is now more appealing, with a P/S ratio of 12.
Lemonade
Despite being the oldest industry on this list, Lemonade has made a significant impact. As an insurtech company, Lemonade has replaced the traditional agent network with AI chatbots that handle customer service and process claims through a smartphone app. While GEICO claimed that 15 minutes could save you money, Lemonade can insure you in 90 seconds and process your claim in three minutes.
Lemonade’s customer base has grown to 1.8 million, offering renters, auto, homeowners, and life insurance products. However, Lemonade is still in its infancy. Its risk underwriting algorithms require more time and data to improve, and the company operates as a small player in a fiercely competitive, multitrillion-dollar industry. With a market cap of less than a billion, this speculative stock has the potential to become a substantial long-term investment if Lemonade can establish itself as a lasting competitor.
It is essential to keep in mind that investing in any of these AI stocks comes with inherent risks and potential rewards. Conduct thorough research and consider your investment goals and risk tolerance before making investment decisions.
These five AI stocks, including Microsoft, Alphabet, Upstart, SentinelOne, and Lemonade, are poised to capitalize on the AI revolution and potentially transform your portfolio. As with any investment, it is crucial to stay informed about the industry, follow market trends, and monitor the performance of these companies to make well-informed decisions.
