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Look, I know it’s hard to set Nvidia aside when discussing artificial intelligence (AI). Its stock has surged 241% this year, catapulting the company to a $1.2 trillion valuation almost entirely on sales of its AI data center chips alone.

But here’s the thing. Cathie Wood, who leads Ark Investment Management, says for every $1 in semiconductor hardware Nvidia sells, AI software companies are going to generate $8 in revenue. It makes sense because software scales far better than hardware; it can be developed once and sold an unlimited number of times.

With that in mind, here are two stocks that might be better buys than Nvidia in 2024.

Image source: Getty Images.

1. Datadog

Datadog (NASDAQ: DDOG) has become an essential tool for its 26,800 business customers. Its platform is designed to monitor cloud infrastructure, sales channels, and digital applications in order to eliminate the blind spots that come with operating in an online world.

For example, Datadog can alert a retail business to a technical fault in its website before it impacts the customer experience. Similarly, Sony‘s PlayStation Network uses Datadog to link its three major operating hubs in Tokyo, San Diego, and San Francisco to unify monitoring and incident response. That company says it can now identify and resolve issues for its 94 million gamers faster than ever before.

Datadog customers across several other industries like financial services, manufacturing, and healthcare have similar positive stories to tell.

However the company has now entered the world of artificial intelligence, and its services are rapidly expanding. In August, Datadog launched an observability tool specifically for developers of large language models (LLMs), which power generative AI applications. It will help identify performance degradation, drift, and hallucinations, all of which can make an LLM less accurate than intended, impacting the quality of the customer-facing application.

It integrates with leading infrastructure and compute platforms like Nvidia, Amazon Web Services, and Microsoft Azure to help developers deploy their models with confidence.

But that’s not all, because Datadog recently launched an AI chatbot called Bits AI, which is designed to serve as a hyperintelligent assistant across its platforms. Users can converse with the chatbot using natural language instead of programming language, which could drastically speed up incident response. In fact, Bits AI can integrate into collaboration applications like Salesforce‘s Slack, delivering incident summaries to team members to accelerate every process, from investigation to resolution.

As of the third quarter of 2023 (ended Sept. 30), Datadog had $2 billion in annual recurring revenue. The company’s CEO, Oliver Pomel, said 2.5% of that was attributable to AI. That might sound like a small number, but considering the technology has only attracted mainstream attention this year, it has likely scaled up very quickly — and will probably continue to do so.

Datadog stock is trading 43% below its all-time high, so now might be a great chance for investors to buy in ahead of the new year.

2. Lemonade

Lemonade (NYSE: LMND) is in a slightly different position than Datadog. It has developed a portfolio of AI software applications, but it doesn’t sell them to other businesses. Instead, it has used them to become one of the world’s first AI-driven insurance companies, offering policies to consumers in the homeowners, renters, life, pet, and car insurance categories.

Lemonade’s AI chatbot, Maya, is capable of writing a quote for a potential customer in under 90 seconds. For existing policyholders, the company’s “AI Jim” can pay out claims in under three minutes. It’s a paradigm shift for an age-old industry that has often been a source of frustration for consumers, particularly when it comes to the claims process, which can be slow and stressful. Having solved that problem, it’s no surprise Lemonade has amassed 2 million customers since launching in 2016.

But Lemonade’s use of AI runs much deeper than the customer experience. Last year, the company introduced its Lifetime Value 6 (LTV6) model, which is capable of predicting the likelihood of a customer making a claim, the likelihood of them switching insurers, and whether they would buy more than one policy. That data is used to calculate the lifetime value of the customer to price their premiums as accurately as possible.

Lemonade has since launched LTV7, LTV8, and it will soon be using LTV9, with each iteration more accurate than the last.

In the third quarter of 2023 (ended Sept. 30), Lemonade’s in-force premium hit a record high of $719 million. The company’s gross loss ratio also came down to 83% from 94% in the year-ago period, thanks to the growing accuracy of its AI models and some of its insurance segments gradually achieving scale.

Revenue also hit a quarterly record of $114 million, which was an impressive 54% increase compared to the same period last year.

Unfortunately, since Lemonade is still in its growth phase, its bottom line remained in the red. The company lost $40.2 million during Q3, but that was a 38% improvement from the year-ago quarter. Plus, management expects Lemonade to be cash-flow-positive by 2025, without requiring any further capital injections. That means investors are unlikely to suffer dilution going forward.

Lemonade is an exciting growth story and it’s tackling a seismic financial opportunity; the car insurance industry in the U.S. alone was worth a whopping $348 billion last year. As a result, Lemonade stock could have as much upside as any other in the emerging AI industry going into the new year and beyond.

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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. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Datadog, Lemonade, Microsoft, Nvidia, and Salesforce. The Motley Fool has a disclosure policy.

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