These Artificial Intelligence (AI) Stocks Are Quietly Outperforming the Market

Artificial intelligence (AI) has dominated the stock market since the launch of ChatGPT in late 2022. At that time, the S&P 500 was in a bear market following the post-pandemic hangover and a spike in inflation. But since then, the broad market index has jumped by more than 50%.

By now, investors are well aware of the top-performing AI stocks like Nvidia and Palantir, but there are other stocks that have more quietly been outperforming the market. Let's take a look at two of them.

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1. Upstart

Upstart (NASDAQ: UPST) was a big winner following its initial public offering (IPO) in December 2020 as the stock skyrocketed during the pandemic in 2021. However, in the bear market that followed, Upstart stock plunged 97% as rising interest rates crushed its lending business (the company operates as an AI-driven online lending platform).

The stock was largely forgotten by investors, but Upstart has made a number of improvements to its business by introducing a new, more advanced AI model that has improved its conversion rates, and moving further into large lending markets like the home and auto sectors. Along the way, it's quietly staged a comeback, and the stock has jumped 175% over the last year (at the time of this writing).

Upstart has more upside potential as the stock's market cap is just $6 billion, and it is trying to disrupt a massive market, competing with traditional FICO scores. According to Upstart, the company's AI-based lending model achieves significantly better results than the FICO score, and the business is growing rapidly with profitability improving.

In the first quarter, revenue was up 67% to $213 million on an 89% increase in originations to $2.1 billion. It also reported a 19.1% conversion rate, up from 14% in the quarter a year ago. On the bottom line, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $43 million, up from a loss of $20 million in the quarter a year ago. The company also expects to be profitable on a generally accepted accounting principles (GAAP) basis this year.

Overall, Upstart still has a large growth opportunity in front of it as credit is a massive market. If it continues to execute, the stock should outperform over the coming years, and further technology improvements could drive an inflection point in the stock.

2. Lemonade

Another overlooked AI stock that is suddenly soaring is Lemonade (NYSE: LMND), the AI-based insurance company.

Like Upstart, Lemonade had a successful IPO during the pandemic and then plunged in 2022 due to ongoing losses, slowing growth, and shifting market sentiment.

However, Lemonade has now mounted a comeback on improving results and a new goal of reaching profitability by 2027. As a result, the stock is now up 160% over the last year. In particular, the stock soared last November after a strong earnings report and an Investor Day conference that pleased investors.

In its most recent earnings report, Lemonade reported an acceleration in force premium growth at 27% to $1.01 billion. Total customers rose 21% to 2.55 million. Its gross loss ratio over the last four quarters was steady at 73%, meaning 73% of its revenue went to paying claims.

Lemonade also shared in the Investor Day conference that it expects to be adjusted EBITDA profitable by 2026 and GAAP net income profitable by 2027.

Lemonade still has some challenges to overcome, and there's always the risk of a disaster like the California wildfires, which weighed on Q1 results, but management's efforts to streamline its business seem to finally be paying off.

At a market cap of $3 billion, the stock could easily double from here, especially if Lemonade executes on its plan to turn profitable.

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Jeremy Bowman has positions in Nvidia and Upstart. The Motley Fool has positions in and recommends Lemonade, Nvidia, Palantir Technologies, and Upstart. The Motley Fool has a disclosure policy.