Two Relentless Artificial Intelligence (AI) Shares Surge by 50% and 150% in 2024, Worth Considering for Purchase in 2025
Two Relentless Artificial Intelligence (AI) Shares Surge by 50% and 150% in 2024, Worth Considering for Purchase in 2025
The financial market has been on a rampage this year. The S&P 500 has seen a 27% surge, which is nearly triple its usual annual growth, a figure that dates back to when the index first launched in 1957.
The tech sector has been spearheading this market surge, and companies associated with the artificial intelligence (AI) revolution are thriving particularly well. For instance, shares of Duolingo (DUOL 4.35%) and Lemonade (LMND 4.29%) have experienced an impressive 50% and 150% increase, respectively, in 2024. Here's why these companies could continue this trend into 2025.
The argument for Duolingo
Duolingo is the globe's leading platform for digital language education. Its mobile-first strategy places highly interactive, gamified lessons within easy reach for just about anyone with a smartphone. During the third quarter, the platform registered 113.1 million monthly active users, a 36% surge from the previous year.
Duolingo, however, managed to grow its paying user count even faster at a 47% rate to 8.6 million. Monthly subscribers can accelerate their learning with additional features, and AI comes into play here. This year, Duolingo introduced a new subscription tier called Max, which is more costly but offers two advanced AI features: Roleplay and Explain My Answer.
Roleplay offers users a chatbot interface to practice speaking in a foreign language of their choice, while Explain My Answer offers personalized feedback based on the user's mistakes in their lessons. In September, Duolingo expanded its AI feature set with Video Call, which allows users to initiate a video chat with a digital avatar to practice speaking a foreign language.
Duolingo aims to deliver a learning experience as effective as a human tutor, and AI will be central to that ambition. The Max plan is currently only available to half of the platform's global users, but the rollout will continue in the following year. According to the company, it's already contributing significantly to the company's financial success.
During the third quarter, Duolingo generated $192.6 million in total revenue, a 40% increase from the same period last year, well beyond its projected range of $189.7 million. The impressive result persuaded the company to adjust its 2024 revenue forecast for the third time, raising it to a projected range of $744 million.
Duolingo's stock may appear overpriced with a P/S ratio of 23.5, a substantial premium compared to its typical average of 15.1 since its IPO in 2021. However, its swift revenue growth makes the stock appear significantly less expensive in the near future.
Wall Street's consensus forecast for 2025 (courtesy of Yahoo) predicts Duolingo will generate $962 million in revenue, giving it a forward P/S ratio of 15.5, practically on par with its trailing average. If Duolingo maintains its current P/S ratio and Wall Street's 2025 revenue forecast is accurate, its stock could increase by 52% in the following year. It could perform even better over the long term if the company continues to grow at this pace, making it an attractive option for long-term investors.
The case for Lemonade
Lemonade is an insurance technology company that focuses on five markets: renters insurance, homeowners insurance, life insurance, pet insurance, and car insurance. It serves 2.3 million customers, and it has successfully attracted younger demographics often underinsured in the past.
Lemonade's innovative use of technology is likely one reason its products appeal to its customers. The company has been developing its AI tools since its inception in 2015, before AI became the buzzword on Wall Street. When a potential customer visits Lemonade's website, they can interact with an AI chatbot named Maya, which can provide a policy quote in under 90 seconds. When a Lemonade policyholder needs to process a claim, AI Jim can handle the process in less than three minutes, typically with minimal human intervention.
Lemonade's application of AI goes further than customer service. It uses AI to price premiums and streamline its operations. The company's LTV models calculate the likelihood of a policyholder making a claim, switching insurers, and purchasing multiple products to allow for appropriate premium calculations. Accurate premium calculations lead to savings for customers and less risk for Lemonade.
Lemonade concluded the third quarter with a record-breaking in-force premium of $889 million, a 24% increase from the previous year, indicating continued accelerated growth from its second-quarter increase of 22%. The remarkable feat is that the company reduced its employee headcount by 7% during this period while still delivering such a robust result due to its reliance on AI for premium calculations and automating business processes.
Lemonade's ratio of lost premiums to total premiums, referred to as the gross loss ratio, dipped to 73% in the third quarter. This is the lowest it's been in four years, which suggests that the company's strategies are effective. The drop in the gross loss ratio, coupled with an increase in renewed premiums and lower employee expenses, propelled Lemonade's net cash flow to an all-time high of $48 million during the quarter. This is a staggering 1,500% increase compared to the same period last year.
As of now, Lemonade's shares are trading at a price-to-sales ratio of 6.1. This is significantly lower than its typical ratio of 19.3 since it first became a public company in 2020.
Given this, Lemonade shares appear to be undervalued despite a 150% increase in their value in 2024. In my view, Lemonade has never been in a better state as a publicly traded company. Additionally, Lemonade is among the few companies currently harnessing the power of artificial intelligence, and I believe this will contribute to the continued growth in its stock value in the coming year.
In light of Duolingo's impressive revenue growth and the predicted increase in its revenue for 2025, investing in its stock could yield a potential return of 52%, making it an attractive option for long-term investors.
Lemonade's reliance on AI for premium calculations and automating business processes has led to a significant decrease in its gross loss ratio and an all-time high net cash flow, indicating that its strategies are working effectively and its shares could be undervalued based on its current price-to-sales ratio.