nvidia it has become the gold standard in artificial intelligence (AI). From supercomputing hardware to subscription software, it provides everything a business needs to build and run AI applications at scale. Not surprisingly, Nvidia is also the most valuable semiconductor company in the world. Of course, I still think the stock is worth buying, and I’m still a shareholder myself, but other AI companies probably offer more upside.
upstart holdings ( UPS -4.33% ) Y CrowdStrike Holdings ( CRWD 0.54% ) They seem like smart long-term investments. Here’s why these two AI growth stocks deserve a closer look.
1. Upstart holdings
Traditional credit assessment models typically incorporate fewer than 30 variables, which means banks often don’t accurately quantify risk when making lending decisions to individuals. To that end, many creditworthy borrowers are excluded, and those who are approved sometimes pay too much interest to borrow money. But Upstart’s platform captures more than 1,500 data points per borrower and measures those variables against 21.6 million payment events (and counting), allowing lenders to more accurately quantify risk to better determine creditworthiness. .
In fact, a report from the Consumer Financial Protection Bureau suggests that compared to traditional credit models, Upstart’s AI models can increase approval rates by 27% and lower the average interest rate by 16%. And that value proposition has boosted Upstart’s financial performance. Last year, transaction volume soared 241% to $11.8 billion, and the number of banking partners on its platform reached 38, up from 12 the year before. In turn, revenue soared 264% to $849 million, with the company posting GAAP net income of $135 million, up from $6 million in 2020.
More importantly, Upstart still has a lot of room to grow. Its technology is currently used to originate auto and personal loans, and those markets are collectively valued at $820 billion. In other words, Upstart’s transaction volume of $11.8 billion in 2021 represents less than 2% of its total addressable market (TAM). Better yet, management plans to expand into new verticals over time, including the $4.6 trillion mortgage origination market and the $644 billion small business loan market.
Today, Upstart is an $8 billion business, worth far less than Nvidia at $605 billion, but it’s well on its way to disrupting a multi-billion dollar industry. With that in mind, I think this stock could grow tenfold in the next decade.
2. CrowdStrike Entries
CrowdStrike has become the gold standard across multiple verticals in the cybersecurity industry. Its platform includes 22 different software products, ranging from endpoint and cloud security to identity protection and managed services. The company’s main innovations are its cloud architecture and the lightweight sensor installed on each protected device. That sensor pulls relevant security data from those devices and transmits it to the cloud, where CrowdStrike’s AI engine analyzes those signals to detect and prevent cyberattacks.
That approach creates a network effect. Each new data point improves CrowdStrike’s AI a bit, and each time a threat is detected in an environment, it can be blocked on all protected devices. That way, each new customer creates value for all existing customers and vice versa. That dynamic has kept CrowdStrike at the forefront of the industry. In fact, Forrest Research recently named the company a leader in endpoint security, managed services, and cybersecurity incident response.
That recognition has come along with red-hot financial results. CrowdStrike grew its customer base by 65% to 16,325 in the last 12 months, and 34% of those customers now use six or more software products, up from just 6% in fiscal 2019 (ended 31 January 2019). In turn, revenue soared 66% to $874 million in fiscal 2022 (ended January 31, 2022) and free cash flow soared 51% to $442 million.
Going forward, CrowdStrike’s strong competitive position and ability to innovate should help it maintain that momentum. For example, it recently released a new software module: Extended Detection and Response (XDR). XDR feeds third party data like Z-climber Y Mime on CrowdStrike’s AI engine, thereby unifying security signals across corporate networks, email systems, cloud workloads, and endpoint devices. By doing so, XDR speeds up incident detection and response.
More broadly, CrowdStrike has a large TAM ($126 billion by 2025, according to management) and the company is clearly capitalizing on that opportunity. If CrowdStrike can grow revenue by 30% per year over the next decade, I think this $50 billion business could grow fivefold over that time. That’s why this AI growth stock seems like a smart buy.
This article represents the opinion of the author, who may not agree with the “official” recommendation position of a premium Motley Fool advisory service. We are motley! Questioning an investment thesis, even one of your own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.