Nvidia has been the talk of the town since generative artificial intelligence (AI) burst onto the scene last year with the advent of OpenAI's ChatGPT. Since then, nearly every tech titan has laid down plans to develop its own version of ChatGPT or other generative AI service.
But investing in Nvidia or even one of the tech giants isn't the only way to play the AI trend. There are many smaller, niche companies that are starting to disrupt traditional models in every industry. The Trade Desk (TTD -1.68%), Lemonade (LMND -10.78%), and Pagaya Technologies (PGY -3.60%) are three AI-driven stocks that could go parabolic.
1. The Trade Desk: Simplifying advertising
AI may be the most exciting and hyped trend on the market right now, but it's not the only one. Advertising is also making a splash these days as it intersects with new technology. The Trade Desk brings all of these trends together in an incredible, high-growth platform.
The Trade Desk's business is simple, yet powerful. It provides an AI-powered marketplace connecting ad buyers and publishers. It calls itself "an enabler, not a disruptor."
That's the bare bones of it, which highlights why its formula is so potent. It harnesses the power of AI to take care of what is otherwise a complex, multistep process and distills it into an easy-to-use system that gets real results.
Its buyers include players like ad agencies and direct advertisers, and its publishers comprise the gamut of sellers from print to social media and streaming. It's a digital enterprise that uses technology to transact, even when the publisher isn't a digital medium, like a print newspaper.
AI is an important piece of the model because The Trade Desk uses a vast trove of data to help place ads in the most results-driven places, which it can determine in seconds. It also provides very detailed reporting, with 200 performance measures and 300 measurable variables.
The Trade Desk has demonstrated robust growth and increasing profits. Revenue increased 23% year over year in 2023, despite the pinch of inflation. Plus, it's still in the early innings of its game and has a $900 billion opportunity in global ad spend. As advertising shifts through technology, the company has years of growth ahead.
2. Lemonade: Disrupting insurance
Lemonade most definitely calls itself a disruptor. It was created to shake up the insurance industry and offer an improved experience to legacy operations. Insurance is an industry ripe for AI disruption since it's all based on data and still functions the way it did a century ago (and longer).
Lemonade works differently in a few ways. It onboards customers through chatbots and approves claims digitally, often in seconds. It's a registered B-corp and gives policyholders with the option to donate any remaining funds to charity.
Most importantly, it was built on a digital substrate and is made to manage a multiprocess system. Its infrastructure connects all of the pieces so they flow together seamlessly, rather than rely on human intervention to move the process from one step to the next. For customers, that results in faster service that's mostly digital.
It also expects its models to become more accurate over time -- so much more accurate that it catches up to and eventually surpasses legacy models. That hasn't happened yet for a number of reasons, most significantly that it's just very young and doesn't have the decades of data that older companies do. It also factors in its own high expenses into its profitability algorithms, and since it's still in rollout mode, those are high.
While many investors feel that Lemonade is taking too long to show progress, management is confident in its AI-powerered model and how it will change insurance. So far, it's proving popular with its target demographic of young customers.
Customer count increased 12% year over year in the 2024 first quarter, and average premium per customer increased 7%. That's the result of Lemonade's upselling and cross-selling strategy. The company's stock could be risky right now, but if and when Lemonade's progress accelerates, its stock could skyrocket.
3. Pagaya: A better credit evaluation model
Pagaya operates an AI-driven credit evaluation platform that helps banks and financial institutions more accurately identify and minimize risk while opening up more opportunities for effective lending. It works with many top brands and has a strong pipeline of new clients that it regularly onboards.
The company recently partnered with U.S. Bank and has six large lenders lined up to join the platform. It's also in talks with other top banks that could generate years of high growth.
A key part of its model is that it sells the loans it approves to institutional lenders as asset-backed securities (ABS). It obtains funding for its loans from the lenders before it makes them, providing plenty of liquidity and opportunity.
Pagaya has been reporting phenomenal growth, which is especially impressive considering the high interest rates that have crushed many lending companies. Revenue and network volume were both up 31% in the 2024 first quarter, and the company raised $1.9 billion in funding including from 18 new sources in its funnel.
Pagaya isn't profitable yet, but it's moving in the right direction. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) turned positive in the first quarter compared with a loss last year in the same period, and management raised its projection for adjusted EBITDA by $10 million after some cost-efficiency actions.
Pagaya isn't a stock for the risk-averse, but it has loads of potential and could be a candidate for an excellent high-growth opportunity.
