It's the final trading day of 2024, and the benchmark S&P 500 (^GSPC -1.11%) index is sitting on a year-to-date gain of 26.9%. That's more than double its average annual return dating back to when it was established in 1957.
The tech sector led the market higher during 2024, and stocks in the artificial intelligence (AI) space performed particularly well. For instance, shares of Docusign (DOCU -2.89%) and Upstart (UPST -5.62%) are up by 63% and 75% on the year, respectively.
AI is likely to remain a key driver of market returns in 2025, so here's why those two stocks might be poised for another great year.
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1. Docusign: Up 63% in 2024
Docusign is a leader in e-signature technology, but the company recently overhauled its product portfolio and launched the new AI-powered Intelligent Agreement Management (IAM) platform. It helps businesses handle the entire contract lifecycle including initial drafting, the negotiating process, and final signatures.
According to Deloitte, businesses lose $2 trillion in economic value each year from poor contract management processes, and the products within IAM can put some of that money back into their pockets. Docusign Navigator, for example, is a digital repository where businesses can store all of their agreements. It uses AI to extract important data from each individual contract, and it can notify businesses when deals are about to expire so no key dates are missed.
Docusign AI, on the other hand, can generate text for the contract drafting stage, and it can even identify problematic clauses in final agreements to alert businesses to potential risks. Then there is Docusign Maestro, which ties IAM together. It's a no-code tool which allows businesses to instantly drag-and-drop features like I.D. verification and e-signature capabilities into each contract, saving them significant amounts of time and money.
During Docusign's fiscal 2025 third quarter (ended Oct. 31), it closed 10 times more IAM deals than it did during the second quarter. Plus, customers are taking IAM live at a much faster pace than Docusign's previous platforms, and they are steadily increasing their usage. In other words, the early signs suggest IAM is becoming extremely popular in the business community.
Docusign is on track to generate a record $2.96 billion in revenue during fiscal 2025 (which will end in January). It will represent a modest increase of just 7% compared to fiscal 2024, because the company is sacrificing some growth by carefully managing costs in order to boost its profitability. During the third quarter alone, Docusign held its expenses flat compared to the year-ago period, which sent its net income soaring by 60% to $62.4 million.
Despite the solid 63% gain in Docusign stock during 2024, it might still be cheap. It trades at a price-to-sales (P/S) ratio of 6.7 as of this writing, which is a 48% discount to its long-term average of 12.9 dating back to when the company went public in 2018:
DOCU PS Ratio data by YCharts
Considering Docusign values its addressable market at $50 billion, its current revenue suggests the company has barely scratched the surface of its opportunity. AI could be the key catalyst which helps unlock more of that value in the new year.
2. Upstart: Up 75% in 2024
The 75% return in Upstart stock this year is part of a broader 425% gain from its 2023 low point. Despite the incredible run, the stock is still down 82% from its record high in 2021. The company originates loans for banks and other financial institutions using an AI-powered algorithm, and its stock plummeted when soaring interest rates cratered the demand for credit during 2022 and 2023.
The Federal Reserve has now cut interest rates three times in the last three months, which sets the stage for a further recovery in Upstart's business in 2025.
Many banks still rely on Fair Isaac's FICO scoring system to determine the creditworthiness of a potential borrower. It was introduced in 1989 and it's calculated using just five key metrics, so Upstart understandably thinks it might be outdated. The company's algorithm uses AI to assess a whopping 1,600 different metrics for a potential borrower instead, which can provide a better understanding of their ability to repay a loan.
In fact, the company says it approves double the number of loans compared to traditional assessment methods, at an interest rate which is 38% cheaper (on average). In other words, by analyzing so much data, Upstart is capturing thousands of high-quality deals that human-driven assessment methods are missing. Plus, AI allows the company to process mountains of data instantly, so it delivers fully automated decisions 91% of the time with no human involvement.
Upstart earns a fee every time it originates an unsecured personal loan, car loan, or home equity line of credit (HELOC) on behalf of one of its bank partners. During the third quarter of 2024 (ended Sept. 30), it originated 186,786 unsecured personal loans alone which was a 65% increase from the year-ago period. It highlights how demand for credit is gradually coming back.
According to Wall Street's consensus forecast (provided by Yahoo), Upstart is on track to deliver $599 million in revenue in 2024 once its final results are in the books. That would represent a 16% increase compared to 2023. The Street then expects the company to generate $821.8 million in revenue during 2025, representing an accelerated growth rate of 37%.
Upstart stock trades at a P/S ratio of 10.8 as of this writing, which is a premium to its long-term average of 8.9. However, its forward P/S ratio (based on Wall Street's 2025 revenue estimate) is just 7.5, which suggests any investor willing to hold the stock for at least the next year might be scooping up a bargain at the current price.
UPST PS Ratio data by YCharts
Upstart says a combined $3 trillion worth of unsecured personal loans, car loans, mortgages, and business loans are originated in the U.S. each year, so the company has an extremely long runway for growth. Therefore, this stock might be a good addition to any portfolio even beyond 2025.
