(Source-Asymmetric-Investors)
The chip industry has already reaped trillions of dollars from artificial intelligence (AI), but software could present an even greater opportunity. Cathie Wood, head of Ark Investment Management, is betting big on this potential. Her firm, which manages eight exchange-traded funds (ETFs) focused on innovative technology stocks, sees software companies as the next major growth area in AI. Wood predicts that software could generate $8 in revenue for every $1 spent on hardware from chip giants like Nvidia.
Wood’s Strategic Investments in AI Software Boom
Since predicting AI software boom, Cathie Wood has significantly invested in this sector. The Ark Venture Fund has acquired shares in private companies such as OpenAI, creator of ChatGPT, and Anthropic, creator of Claude, as well as Elon Musk’s xAI. Moreover, Tesla, known for its autonomous self-driving software, is the largest holding in the flagship Ark Innovation ETF. Wood believes Tesla’s AI-driven software represents the world’s biggest AI opportunity.
If Wood’s predictions hold true, several stocks might yield impressive returns. Two companies particularly worth noting are Palo Alto Networks and C3.ai, both positioned to benefit from AI advancements.
Palo Alto Networks: Leading AI-Based Cybersecurity
Palo Alto Networks is at the forefront of AI-driven cybersecurity, addressing the significant rise in cyber threats. The company has seen a tenfold increase in phishing emails and other cyberattacks over the past year. Traditional security operations centers (SOCs), which rely heavily on human-led processes, are overwhelmed, leaving 23% of incidents uninvestigated.
Palo Alto’s AI-powered solutions automate threat detection and response, significantly enhancing cybersecurity. Its Cortex XSIAM platform, launched last year, automates SOC functions, reducing the need for human intervention. For example, in an oil and gas company, XSIAM cut the number of incidents requiring human investigation by 75%. In another case, it reduced incident response times from three days to just 16 minutes.
In the third quarter of fiscal 2024, Palo Alto generated $2 billion in revenue, a 15% increase from the previous year. This growth is part of a shift towards a platform-based business model. Customers using all three of its platforms (cloud, network, and operations) are significantly more valuable, with a lifetime value 40 times higher than those using just one.
The company aims to increase its annual recurring revenue to $4.1 billion by the end of fiscal 2024, a 39% rise from the previous year, and to triple this figure to $15 billion by fiscal 2030. This ambitious growth plan makes Palo Alto an attractive investment opportunity.
C3.ai: Accelerating Growth in Enterprise AI
Founded in 2009, C3.ai is an enterprise AI company offering over 40 applications across 19 industries. These applications enable businesses to integrate AI quickly and cost-effectively. C3.ai’s solutions are particularly popular in sectors like energy, financial services, and manufacturing. For instance, banks use C3.ai’s Smart Lending application to assess creditworthiness and its Anti-Money Laundering application to detect suspicious transactions. Chemical giant Dow Inc. uses C3.ai’s Reliability application for predictive maintenance, reducing equipment downtime by 20%.
In the fourth quarter of fiscal 2024, C3.ai reported 487 customer engagements, a 70% increase from the previous year, driving a record-high revenue of $86.6 million, up 20% year over year. This marked the company’s fastest growth in nearly two years and the fifth consecutive quarter of accelerated growth. The transition to a consumption-based revenue model, which allows customers to scale their spending more easily, is paying off.
Although C3.ai reported a $14 million non-GAAP loss in Q4 due to heavy investment in growth initiatives, it boasts a strong balance sheet with $750 million in cash and equivalents. This financial stability positions C3.ai for continued growth and makes it a promising investment for those with a long-term outlook.
Investment Considerations
Before investing in companies like Palo Alto Networks and C3.ai, it’s important to consider expert advice. The Motley Fool Stock Advisor, for instance, provides a curated list of top stocks that could deliver significant returns. While Palo Alto Networks is not currently on this list, the service’s track record—such as recommending Nvidia in 2005, which saw immense returns—demonstrates its reliability.
Investors should weigh the potential of AI software boom and these specific companies as part of a diversified portfolio strategy. With Cathie Wood’s optimistic outlook and strategic investments, AI software boom indeed seems poised for significant growth in the coming years.
