Artificial intelligence (AI) is the hottest trend in the market today. While it has been associated with some hype, AI appears to have some staying power and is poised to have a real effect on the economy. People and businesses are using AI to utilize and create all kinds of transformative applications. Creating photographic images never before possible and analyzing data at unprecedented speeds are just two examples.
Companies are harnessing the power of AI to run better and faster, and many of them are disrupting the status quo and capturing market share. Some of these companies are established businesses that are using their strong assets to lead the charge, and others are small, innovative startups that are disrupting the norm in niche segments of the economy.
Let’s look at an example of each category: Amazon (NASDAQ: AMZN) and Lemonade (NYSE:LMND) — and see why each one could help you build a millionaire portfolio.
1. Amazon: Leading with generative AI
Amazon has a long history of massive investment in AI and is now focusing its attention and resources on embedding and expanding generative AI. It uses AI across its many businesses, but its most interesting AI opportunities involve Amazon Web Services (AWS), its cloud computing segment.
People who know Amazon primarily as an e-commerce giant may not know that it is also the leading cloud computing company globally. It is a $100 billion run-rate business and has 31% of the global market. Amazon has developed a competitive set of generative AI tools for AWS users that simplify access and create incredible opportunities. It has a variety of services across three tiers to meet different needs.
The base layer is for developers to create their own large language models (LLMs), which are the key foundation for generative AI. These are models that have been trained with so much data that they can start creating or generating without intervention. This is what OpenAI’s ChatGPT is known for, and this is where NvidiaNvidia’s chips are powerful enough to handle the data load needed to make this work, and it’s a big reason why Nvidia’s sales and stock have soared over the past two years.
The next level is for developers to use Amazon LLMs to generate AI for specific businesses, and the top level involves turnkey solutions for companies that don’t need custom services. One example is a tool that creates page descriptions for products in Amazon stores when a user enters a URL.
AWS accounts for about 17% of Amazon’s total sales, but 61% of operating income. As AWS becomes a larger part of the total, profitability could skyrocket. Amazon stock typically follows earnings, and this could boost Amazon stock enormously in the coming years, leading to incredible gains for investors who buy now.
As with any major stock, becoming part of a millionaire’s portfolio depends on how much you invest and how long you wait. Some stocks can turn into millions on their own; if you had invested $1,000 in Amazon stock at its IPO, you’d have more than $2 million today. I’m not sure you can do it again, but you can beat the market average and contribute to a diversified portfolio of winning stocks that, taken together, can lead to millionaire status.
2. Lemonade: A Compelling AI Disruptor
Lemonade uses artificial intelligence to power its innovative insurance model. It’s a young company that’s been in business for less than 10 years and has already attracted more than 2 million members and counting. It has reported consistent, strong growth every quarter since going public four years ago. In the first quarter of 2024, in-force premium, which measures the average annual total of policies, increased 22% year-over-year and revenue increased 25%.
Lemonade has a key advantage over traditional insurers because it was built on a digital infrastructure powered by artificial intelligence. All of its parts work together instantly, and management touts this connectivity as the main reason its model will eventually outpace the competition. Traditional models, which require more human intervention, won’t be able to keep up with Lemonade. However, it’s still building its database as it grows rapidly and adds new members and policies, so it’s taking time to get to that point.
Management has provided a recent example where AI mechanisms are already producing significant results. In the insurance industry, the loss adjustment expense (LAE) ratio measures how efficiently an insurer manages overhead costs. The standard for large companies is around 10%, but Lemonade’s is 7.6% despite its small size. The company attributes this to its reliance on technology to manage claims, which increases efficiency and improves customer experience. It expects this type of impact to be reflected in more aspects of its performance as it collects more data.
Meanwhile, it’s taking longer than investors would like for it to turn profitable, and Lemonade’s stock is still trading nearly 90% below its all-time highs. Granted, that was when it was trading at a very high valuation, but it’s now trading at 2.5 times trailing 12-month sales, which is very cheap for a growth stock. It may take a while, but Lemonade could be a standout stock when its algorithms kick in with better data and it starts reporting earnings.
A large enough investment in Lemonade today could turn into a million dollars in many years if Lemonade can make its business profitable. Consider how small Lemonade is compared to industry leaders like Progressive and The whole state.
If Lemonade can grow to revenue levels comparable to those of its competitors, its stock could offer significant returns and make millionaires of shareholders who buy it early.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has positions in Lemonade. The Motley Fool has positions in and recommends Amazon, Lemonade, and Nvidia. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.
2 AI Stocks That Could Make You a Millionaire was originally published by The Motley Fool