Artificial intelligence (AI) sent investors into a frenzy in 2023. It all started with MicrosoftJanuary’s $10 billion bet on artificial intelligence startup OpenAI, which develops the popular online chatbot ChatGPT. After September Amazon invested $4 billion in OpenAI competitor Anthropic.
But these trillion-dollar tech giants weren’t the only ones snapping up AI assets. Everyday investors spotted several small-cap AI stocks with explosive potential throughout the year, including C3.ai (ALL INCLUDED -5.03%) and Upstart Holdings (UPST -7.47%). These stocks recorded gains of 159% and 217% respectively in 2023 and 2024 could bring more upside.
Here’s why it’s not too late to take advantage of these opportunities in the new year.
1. C3.ai’s revenue growth is set to accelerate
Founded in 2009, C3.ai was one of the first companies to provide AI products and services to businesses. Today it has developed more than 40 ready-made and customizable applications to bring artificial intelligence to at least 10 different industries, accelerating the adoption of the technology by its customers.
For example, the C3.ai Demand Forecasting platform can help businesses improve the accuracy of their forecasted sales by up to 15%. This allows them to maintain more appropriate inventory levels and pricing, which leads to happier customers.
Similarly, C3.ai Reliability is the ultimate predictive maintenance tool and can cut unplanned equipment downtime in half by detecting unusual activity before it leads to disaster. It is used by some of the largest organizations in the world, including Shell and the US Air Force.
C3.ai’s revenue growth has slowed to an upward trend over the past 18 months. It was the expected temporary consequence of a major shift away from subscription-based deals and towards consumption-based deals. Subscriptions require lengthy negotiations between C3.ai and the customer, which increases acquisition costs and slows down the onboarding process. By moving to a consumption model, customers can come and go as they please and only pay for what they use.
C3.ai is still transitioning its existing customers to the new model, but progress is now picking up fast. In its recent fiscal second quarter of 2024 (ended Oct. 31), the company’s revenue was $73.2 million, representing a 17% year-over-year increase. This was the fastest growth rate in over a year, and C3.ai’s forecasts suggest it will continue to accelerate in the coming quarters.
C3.ai stock has gained 159% in 2023, but remains 83% below its all-time high set during the tech frenzy of late 2020. Investors got a little carried away with the company’s valuation back then, but this has created an opportunity for new buyers to buy C3.ai shares at a discount now in view of a predicted upside in its business.
Image source: Getty Images.
2. Upstart should benefit from falling interest rates
Upstart was a stock market darling during the pandemic. It went public at $20 per share in December 2020 and soared to $401 in less than a year. The company has developed an AI-based algorithm designed to assess the creditworthiness of potential borrowers and has seen explosive growth while interest rates have remained historically low.
However, rising inflation and a subsequent rate hike in 2022 sent Upstart’s stock down 97%. Demand for unsecured personal loans and auto loans — Upstart’s two core segments — collapsed, and investors worried that the company’s AI algorithm had not been tested in such a difficult economic environment.
However, after much data to the contrary was released, Upstart’s stock jumped 217% in 2023. It remains about 90% below its all-time high, but this could be an opportunity for buy-now and hold investors.
You see, Upstart’s AI-based approach likely represents the future of lending. Its algorithm can autonomously analyze 1,600 data points on a potential borrower and provide immediate approval 88% of the time. It is much more effective than manual evaluation methods based on human-centered methods Holy IsaacThe FICO credit scoring system, especially when you consider that it only focuses on five key metrics to determine creditworthiness.
In addition, Wall Street experts believe the US Federal Reserve will cut interest rates six times in 2024, which could reignite consumer demand for loans. Upstart’s revenue is set to fall 40% in 2023 compared to 2022, but Wall Street analysts predict it will return to growth in 2024 thanks in part to those improved conditions for borrowers.
Upstart does not lend money itself. It originates loans on behalf of more than 100 banks and credit union partners and earns commissions for doing so. Over $4 trillion in personal loans, auto loans, business loans and home loans originate in the US each year, and yet Upstart has just $35 billion in its history. This implies a long development corridor.
Upstart just entered the mortgage segment with its home equity line of credit (HELOC) product. It’s the company’s biggest opportunity ever, and now could be a great time for investors to buy its stock before the business takes off.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is on the board of The Motley Fool. Anthony Di Pizio has no position in any of the stocks listed. The Motley Fool has positions and recommends Amazon, Microsoft and Upstart. The Motley Fool recommends C3.ai and Fair Isaac. The Motley Fool has a disclosure policy.