Artificial intelligence (AI) is already proving its mettle, and that's reflected in market sentiment. The S&P 500 is heavily weighted toward AI stocks like Nvidia, Microsoft, and Amazon, and the success of these top stocks is pulling up the broader market.
But while these winning stocks might be dictating the terms of AI acceptance, there are many fresh, young faces that are using AI in niche industries and have incredible long-term opportunity. Consider Lemonade (LMND -4.70%), Opendoor Technologies (OPEN -4.97%), and Pagaya Technologies (PGY -7.06%).
1. Lemonade
Lemonade uses AI to provide fast and accurate insurance policy quotes and claims decisions. It made a splash on Wall Street when it went public a few years ago, but its stock has tanked as it continued to crank out losses and lose investor confidence.
However, there's a good chance that it will become profitable soon and revolutionize the insurance industry. It's already making waves and forcing legacy insurance companies to take notice. Warren Buffett himself, whose holding company, Berkshire Hathaway, is one of the largest insurers in the country, has mentioned more than once that it's behind the curve in insurance technology and is at a disadvantage. If Lemonade is making headway against companies like Berkshire Hathaway's GEICO and other large competitors, it can capture market share and become a real player.
So far, this is what's playing out, although Lemonade is still a small fish. It had $794 million in in-force premium (IFP) in the 2024 first quarter, which is the average annualized total policy amount, and $119 million in revenue. IFP increased 22% over last year, and revenue increased 25%.
Lemonade touts that it's built on a digital substrate, and all of its operations are connected to each other, making for instant calculations and speedy processes. What it doesn't have yet is enough data and experience to leverage its systems into an edge. But management is confident that's coming. When it does, and scale turns into profits, Lemonade could outdo legacy insurers.
As Lemonade continues to report high growth, the stock will reflect that. But it should really skyrocket when Lemonade's loss ratio stabilizes and it begins to report profits. It requires a good dose of risk tolerance and some patience, but if you have those, Lemonade could be part of a millionaire-maker portfolio.
2. Opendoor Technologies
Opendoor operates a tech platform for residential real estate. Although it's demonstrating relevance and capturing customer interest, it's in the middle of a huge industry downturn, and its performance has tanked.
It uses data science, with nine years worth of data and 10 million offers, to create a real estate platform with accurate pricing to help people buy and sell homes. Although the end-user AI is the most compelling at first glance, it uses AI throughout its operations, offering high-tech workflow tools, data analytics, and more.
In general, this idea is picking up steam, and Opendoor could have an incredible future ahead of it -- under the right conditions. Only 1% of the real estate business happens online; it's one of the least penetrated industries, giving it the most opportunity. It has built up its platform over time and is one of the top players.
Opendoor stock trades at a dirt-cheap price-to-sales ratio of 0.3. That's an incredible bargain for a stock with high-growth opportunities. If it does turn around, investors could see their money gain by many thousands of percent. It's a high-risk, high-reward situation, and most investors will want to wait for the real estate climate to improve before giving this stock a chance.
3. Pagaya Technologies
Pagaya uses AI to help financial clients assess borrower credit and with other risk-management decisions. It counts high-profile names like Visa and U.S. Bank among its clients, and it has a steady pipeline of new clients for its AI-driven platform. It has evaluated more than 2 trillion applications over its lifetime, informing its AI models with loads of data to create accurate assessments.
It works as a double-sided platform that gets up-front funding for the loans it approves, which it bundles into asset-backed securities (ABS) and sells back to large institutional lenders. It has 116 lending partners and 30 clients as of the end of the 2024 first quarter, and it's the top issuer of personal loan ABS in the U.S. Since it sells back all of its loans and doesn't keep any on its balance sheet, it has limited exposure to interest rate fluctuations.
Despite the grim interest-rate environment, Pagaya continues to report growth all around. Revenue and network volume both increased 31% year over year, and it raised $1.9 billion in funding, including from 18 new partners.
Pagaya is young and not profitable, but Wall Street expects it to report positive net income next year. It also expects Pagaya stock to double over the next 12 to 18 months. There's plenty of risk here, but as Pagaya grows its business, its stock could be a standout. And as soon as interest rates come down, the business could pick up even more, meaning the stock could surge very soon. If you hold it over many years, it's likely to double, triple, and more, helping investors create a millionaire-maker portfolio.
