Ark Investment Management is a private firm focused on putting investors' money toward developing innovative technologies. It's led by Cathie Wood, one of the more vocal tech-sector bulls on Wall Street.
Ark Invest buys shares in companies building the future and packages them into exchange-traded funds (ETFs) to give everyday investors simple, easy access to its strategies. Electric vehicles, robotics, fintech, healthcare technology, and artificial intelligence (AI) are just a few areas Ark Invest is betting on for the long term.
Among the tech trends, none have more potential than AI
Ark Invest recently issued its "Big Ideas 2023" report, which highlighted 14 industries that could deliver incredible value in the coming years. Artificial intelligence was the subject of a particularly bullish prediction: The firm believes AI will add $200 trillion to global economic output by 2030. Considering global gross domestic product (GDP) came in at just $96 trillion in 2021, Ark Invest's forecast points to explosive growth for the remainder of this decade.
A surge in workforce productivity is expected to lead the charge. Ark Invest forecasts the cost to train generative AI models similar to OpenAI's ChatGPT could decline by 70% per year between now and 2030. That means AI-powered tools that write computer code, for example, could become so advanced that programmers will be 10 times more productive. Similarly, the cost to deliver 1 billion inferences from a language model would decline to just $650 by 2030. That cost was $10 million last year. This could have implications for just about every industry, as access to AI technology would no longer be financially prohibitive.
Ark Invest believes the revenue opportunity for companies developing AI software could top $14 trillion per year by the end of the decade. If that proves to be true, here are three AI-related stocks that could deliver substantial upside for investors who buy them now.
1. Lemonade
Lemonade (LMND 6.15%) uses artificial intelligence to disrupt the insurance industry. It has woven the technology through every aspect of its business, from the way it prices premiums to the way it interacts with customers. Last year, the company unleashed its Lifetime Value 6 (LTV6) model, its most advanced AI to date.
LTV6 predicts the lifetime value of a customer by calculating the odds they'll file a claim, purchase multiple products, or even switch insurers. Adding those metrics into the traditional mix (like where a customer lives and parks their car) can result in a more accurate premium, which is a win-win for both Lemonade and the customer.
But LTV6 goes a step further. It also analyzes Lemonade's business to identify geographic areas or product categories that are under- and overperforming, so the company can quickly make adjustments to maximize revenue.
Then there's Lemonade's unique customer experience. Its online chatbot, Maya, can write an insurance quote in under 90 seconds, and pay claims in less than three minutes -- all without human intervention. Consumers are flocking to Lemonade as a result, mostly from its largest competitors. It had 1.8 million customers at the end of 2022, up from 1 million just two years ago.
The company also had $625 million in in-force premiums at the end of 2022 across its five main insurance categories: homeowners, renters, life, pet, and auto. Considering the U.S. auto insurance market could be worth $330 billion in 2023 alone, Lemonade has barely scratched the surface of its opportunity. It's still investing in growth at the expense of profitability, though, which can be a risky strategy in this tough economic environment. It's a key reason Lemonade stock is currently down 92% from its all-time high, so investors need to keep that in mind.
2. Splunk
Machine learning is a subfield of artificial intelligence. AI is commonly described as software that is trained to think or behave like humans do, whereas machine learning refers to models bred for specific purposes. Splunk (SPLK 0.07%) is a specialist in that precise area, providing all the tools its business customers need to benefit from the technology.
Splunk's platform is designed to ingest mountains of data, analyze it, and deliver actionable insights -- all in a live environment. As more organizations shift their operations into the cloud, they're generating more data than ever and don't always have the expertise to draw value from it. That's why 90 of the Fortune 100 companies are on Splunk's customer list.
There perhaps isn't a better use-case example than the McLaren Formula 1 racing team. It uses Splunk to absorb and learn from 1.5 terabytes of data per race to make real-time adjustments to the car to unlock maximum performance.
At the conclusion of fiscal 2023 (ended Jan. 31), Splunk had 790 customers spending at least $1 million per year. That was up 17% compared to the end of fiscal 2022, and it highlights how critical machine learning has become for large, complex organizations.
Splunk now has $3.67 billion in annual recurring revenue (ARR). Half of that comes from its cloud-based product offerings, which make its platforms more accessible and gel with the needs of modern corporate networks more effectively. The cloud segment of its ARR is growing at a compound annual rate of 64%, almost triple the pace of its non-cloud portion.
The company is also on the cusp of profitability, so with its stock down 59% from its all-time high, now might be a great time to buy in.
3. Upstart
Upstart(UPST 3.72%) might be the riskiest play of this bunch. The company experienced some turbulence recently amid the tough economic environment, which has slammed the door on its previously surging growth.
Upstart is attempting to revolutionize the way banks assess potential borrowers by using artificial intelligence to analyze 1,600 data points to determine creditworthiness. It considers itself a step up from Fair Isaac's traditional FICO credit scoring system, which weighs just a handful of metrics.
The other key difference is Upstart's AI algorithm can make an instant, fully automated lending decision about 82% of the time -- there's simply no way a human-driven manual assessment process inside a bank can work that quickly, so Upstart could save institutions a substantial amount of time and money in the long run. It's a good example of the productivity increases referenced by Ark Invest thanks to AI.
But since the U.S. Federal Reserve has embarked on its most aggressive campaign to hike interest rates in its history, investors have expressed concerns about the performance of Upstart's algorithm. Up until this point, it wrote loans in a benign economic climate and wasn't battle-tested in a recession, for example. Despite these worries, the number of banks and car dealers using Upstart to originate loans has continued to surge to new highs.
Upstart remains confident its algorithm is operating as forecast, but combined with a substantial decline in loan demand from consumers (thanks to rising rates), the company has experienced a slowdown in its revenue growth.In fact, its $842 million in 2022 revenue was actually a 1% drop compared to 2021 -- after growing by a whopping 264% in that prior year.
Upstart stock is down 96% from its all-time high, and the company is valued at just $1 billion as of this writing. That places the stock at a price-to-sales ratio of just 1.2, which is the cheapest level since the company went public in 2020. That's certainly a rock-bottom valuation, but buying in now is not without risk. If it does pull through this tough period, however, it could deliver monster gains for investors.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade, Splunk, and Upstart. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.
