According to Grand View Research, the global artificial intelligence (AI) market was worth an estimated $62 billion in 2020 but could grow 40% annually through 2028. If you don’t yet have AI stocks in your long-term portfolio, it might be time to start thinking about it.
The market’s recent sell-off of technology and high-growth companies has created a great buying opportunity for bold and patient investors. Here are three top AI stocks building moats around their algorithms and whose stocks are attractively priced today.
Importance of being a “first mover”
Technology can change at a blistering pace, and nobody can know for sure that the winners of today will still hold their crown tomorrow, a year from now, or a decade from now. However, being “first” can be an advantage for AI companies, especially those using machine learning, where algorithms mimic a human mind, adapting and learning from data over time.
The longer the algorithms do something, the better they tend to be at accomplishing the task. A company using machine learning to perform its business could create a “moat” or competitive advantage against newer threats that haven’t yet gone through that learning curve. Investors may want to keep that in mind as they consider some potential first-movers in the AI space.
1. Upstart Holdings
Your FICO credit score has become a focal point of many people’s financial identity. It often determines whether someone gets approved for a loan or gets funding to buy a car. The FICO score has been around for decades and its criteria for scoring relies on some old-school ideas about creditworthiness. Upstart Holdings (NASDAQ:UPST) is disrupting the FICO score by incorporating algorithms to make lending decisions using consumer data and not an individual’s credit score.
The company claims that its technology will originate loans at the same approval rate while reducing defaults by 75%. Upstart’s primary revenue comes from fees it receives for referring loans to its network of lending partners. It’s currently partnered with 31 lenders, up from 10 a year ago, and a few have even completely abandoned FICO scores, relying solely on Upstart’s technology.
Upstart’s revenue grew 250% year over year in the third quarter of 2021 to $228 million, and the company is already profitable, generating $29.1 million in net income during the quarter. The stock price has come down more than 70% during this tech sell-off, which could be a great buying opportunity as Upstart expands into new loan categories over the coming years, like automotive and mortgages.
2. Affirm Holdings
With buy now, pay later (BNPL) loans, consumers can borrow to purchase an item and pay it back in a fixed number of installments, often interest-free. BNPL has become increasingly popular, threatening to eat away at credit card companies’ stranglehold on consumer spending. Affirm Holdings (NASDAQ:AFRM) is among the BNPL leaders, using algorithms to make lending decisions at the point of sale when a customer is making a purchase, analyzing how much to approve a user for.
Affirm is positioning itself well within the e-commerce landscape, partnering with major online retailers including Amazon, Shopify, Walmart, Target, and many other brands that users can shop via Affirm’s smartphone app. The BNPL industry has gotten some attention after a report came out that indicated that one-third of U.S. borrowers were falling behind on their BNPL installments. But looking at Affirm’s earnings filing for the quarter ended Sept. 30, 2021, only about 5% of the company’s loan balances are behind, which could indicate that Affirm’s algorithms are making much better lending decisions than its competitors.
The stock had fallen near its lowest price since going public last year, before Affirm announced its Amazon partnership. On top of that, Affirm should launch its debit card this year, which will give users the ability to use Affirm at physical stores, and then retroactively split purchases into BNPL installments.
3. Opendoor Technologies
Real estate is arguably the largest industry in the world. The collective value of homes in the U.S. alone is much as $29 trillion. However, the process of buying a home hasn’t changed much over the past several decades. Opendoor Technologies (NASDAQ:OPEN) pioneered iBuying, the business model of buying houses with cash offers and reselling them on the open market. The company uses algorithms to price its offers on homes and gauge the housing market’s momentum.
Real estate tech company Zillow Group was Opendoor’s primary competitor and tried to rush into iBuying to compete. However, Zillow’s immature pricing models caused the company to make poor buying decisions, incurring financial losses, and forced Zillow to quit iBuying. This leaves Opendoor with only one notable direct competitor in Offerpad.
The market turned against iBuying in general when Zillow quit, pushing Opendoor’s stock down to just a $6 billion market cap, a fraction of the nearly $15 billion in revenue that analysts expect for 2022. If Opendoor can turn profitable and prove that it can execute the iBuying model over the long term, the stock could have a lot of future upsides thanks to a massive real estate industry with tons of room for expansion.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.