2 Artificial Intelligence (AI) Stocks Trading Under $50 That Can Supercharge Your Portfolio

Semiconductor companies have so far absorbed most of the value created by artificial intelligence (AI). Nvidiafor example, it has added a whopping $2.7 trillion to its market cap by early 2023, thanks to its graphics processing units (GPUs) for data centers that are designed for developing AI models.

However, Ark Investment Management founder Cathie Wood believes AI software companies will eventually generate $8 in revenue for every dollar spent on hardware and chips. This means an opportunity for investors with a long-term mindset.

DigitalOcean (Doc -0.26%) and Lemonade (LMND 0.51%) they could be big winners if Wood is right. Shares of both companies are trading below $50, and here’s why they could supercharge your portfolio over the long term.

1. DigitalOcean

DigitalOcean is a cloud computing service provider, but focuses specifically on small and medium-sized businesses (SMBs). This sets it apart from industry giants such as Amazon and Microsoftwhich typically serve large, high-expense enterprises.

DigitalOcean offers everything from data storage to website hosting to complex software development tools and combines them with cheap and transparent pricing, a simple dashboard for easy deployment, and highly customized services to meet the needs of SMBs – those who do not have in-house. technical expertise. Now the company is taking those characteristics and applying them to its growing portfolio of AI services.

DigitalOcean acquired Paperspace last year, which operates multiple data centers with a wide range of GPU options (including Nvidia’s flagship H100) aimed at AI developers. Paperspace can be up to 70% cheaper than cloud providers like Microsoft Azure because it offers per-second billing to reduce waste and no lock-in contracts. In addition, Paperspace has a low cost structure due to its niche service offering, which keeps prices low.

Last week, DigitalOcean became one of the only cloud providers to start offering fractional GPU capacity. It means businesses can access between one and eight Nvidia H100 GPUs, making AI implementation affordable for even the smallest enterprises. Other cloud providers typically do not operate at such a small scale, as they are more focused on large customers that rent thousands of GPUs at once.

DigitalOcean generated record total revenue of $192.5 million during the second quarter of 2024 (ended June 30), which represented a 13% year-over-year increase. However, its revenue attributable to AI increased by 200%. Even though the company hasn’t disclosed exactly how much revenue it has generated from AI, this growth rate implies incredible demand for its new services.

DigitalOcean shares are up 18% this year, but still trade 66% below their all-time high, which was set during the tech frenzy of 2021. Its price-to-sales (P/S) ratio is currently 5, 6, which is 35% below its average of 8.6 since the company went public three years ago. In other words, this could be a great entry point for long-term investors, especially since DigitalOcean is one of the only AI service providers for SMEs.

2. Lemonade

Let’s face it — nobody likes dealing with insurance companies. The claims process can involve long phone calls and slow payments, adding to an already stressful time. Lemonade uses AI to overhaul the entire experience, from customer interactions to how premiums are calculated for renters, homeowners, life, pet and auto insurance products.

It all starts with Maya, an AI chatbot on the Lemonade website that is able to write quotes for potential customers in less than 90 seconds. When it’s time to make a claim, AI Jim can handle the entire process in less than three minutes without human intervention.

Lemonade had a record 2.1 million customers at the end of the second quarter and is having success with younger age cohorts that have been underinsured in the past. The tech-focused user experience is probably one reason for that, but so is the company’s “Giveback” program, which donates a portion of premiums to charities that support social causes.

Lemonade also makes heavy use of AI in the background. Its Lifetime Value (LTV) models help the company predict the likelihood that customers will make a claim, switch insurers and purchase multiple policies to calculate fair premiums. Lemonade is constantly releasing new versions of its LTV models, and each iteration offers improvements in accuracy and performance.

The company’s premium in force hit a record $839 million in Q2. This led to revenue of $122 million, which was a 17% increase over the year-ago period. Lemonade also generated positive net cash flow ($4 million) during the quarter and expects to remain in positive territory for most of the time going forward. Maintaining profitability based on net cash flow will allow the company to fuel its growth without needing more money from outside investors.

AI will be a huge tailwind in this regard. Over the past year, Lemonade has been able to reduce its headcount (headcount) by 9% while simultaneously growing its insurance book by 22% because AI does so much of the heavy lifting.

Despite all of Lemonade’s success to date, its stock trades at a P/E ratio of just 2.5, which is close to the cheapest level in its history as a public company. Its insurance products are currently available in the US, UK and three European countries. However, it plans to expand to another two dozen countries in Europe soon, so it could be on the verge of a new wave of growth.