Artificial intelligence (AI) swept investors into a frenzy in 2023. It all started with Microsoft‘s $10 billion bet in January on generative AI start-up OpenAI, which develops the famous ChatGPT online chatbot. Then in September Amazon invested $4 billion in OpenAI rival Anthropic.
But those trillion-dollar tech giants weren’t the only ones scooping up AI assets. Everyday investors identified several small-cap AI stocks with explosive potential throughout the year, including C3.ai (AI -5.03%) and Upstart Holdings (UPST -7.47%). Those stocks recorded gains of 159% and 217%, respectively in 2023, and 2024 could bring more upside.
Here’s why it isn’t too late to buy into those 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 ever to provide AI products and services to businesses. Today it has developed over 40 ready-made and customizable applications to bring AI to at least 10 different industries, accelerating its customers’ adoption of the technology.
For example, the C3.ai Demand Forecasting platform can help businesses improve the accuracy of their forward sales projections by up to 15%. That 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 slash unplanned equipment downtime in half by detecting unusual activity before it leads to catastrophe. It’s used by some of the world’s largest organizations, including Shell and the U.S. Air Force.
C3.ai’s revenue growth slowed to a crawl over the last 18 months. It was the expected temporary consequence of a major shift away from subscription-based deals and toward consumption-based deals. Subscriptions require lengthy negotiations between C3.ai and the customer, which increases acquisition costs and slows the onboarding process. By moving to a consumption model, customers can come and go as they please and simply pay for what they use.
C3.ai is still transitioning its existing customers over to the new model, but progress is now ramping up quickly. In the recent fiscal 2024 second quarter (ended Oct. 31), the company’s revenue came in at $73.2 million, which represented a 17% year-over-year increase. That was the fastest growth rate in over a year, and C3.ai’s projections suggest it will continue to accelerate in the coming quarters.
C3.ai stock gained 159% in 2023, but it remains 83% below its all-time high, which was set during the tech frenzy at the end of 2020. Investors got a little carried away with the company’s valuation back then, but that created an opportunity for new buyers to scoop up C3.ai stock at a discount now ahead of a material projected upswing 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 it 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 it experienced explosive growth while interest rates were sitting at historic lows.
But the soaring inflation and rising interest rates that followed in 2022 sent Upstart stock plunging 97%. Demand for unsecured personal loans and car loans — Upstart’s two main segments — collapsed, and investors became worried the company’s AI algorithm wasn’t battle-tested in such a challenging economic environment.
But after publishing mountains of data to the contrary, Upstart stock has jumped 217% in 2023. It remains roughly 90% below its all-time high, but that might spell opportunity for investors who buy in now and hold for the long term.
See, Upstart’s AI-powered approach likely represents the future of lending. Its algorithm can autonomously analyze 1,600 data points on a potential borrower and deliver an instant approval 88% of the time. It’s far more efficient than manual human-led assessment methods that rely on Fair Isaac‘s FICO credit scoring system, especially considering it only focuses on five core metrics to determine creditworthiness.
Plus, Wall Street experts believe the U.S. Federal Reserve will slash interest rates six times in 2024, which could reignite consumers’ demand for loans. Upstart’s revenue is on track to fall by 40% in 2023 compared to 2022, but Wall Street analysts are predicting it will return to growth in 2024 thanks in part to those improved conditions for borrowers.
Upstart doesn’t lend any money itself. It originates loans on behalf of more than 100 bank and credit union partners and earns fees for doing so. More than $4 trillion worth of personal loans, car loans, business loans, and mortgages are originated in the U.S. each year, and yet Upstart has only originated $35 billion in its history. That implies a long runway for growth.
Upstart just entered the mortgage segment with its home equity line of credit (HELOC) product. It’s the company’s largest-ever opportunity, and now could be a great time for investors to buy its stock ahead of that business ramping up.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, and Upstart. The Motley Fool recommends C3.ai and Fair Isaac. The Motley Fool has a disclosure policy.
