Cathie Wood Highlights Software as the Upcoming Major AI Prospect, Suggesting Two Stocks That Could Be Profitable If She's Correct
Cathie Wood Highlights Software as the Upcoming Major AI Prospect, Suggesting Two Stocks That Could Be Profitable If She's Correct
Ark Investment Management manages a range of exchange-traded funds (ETFs) concentrating on forward-thinking tech stocks. Cathie Wood, the firm's founder, is convinced that software companies are on the verge of a significant opportunity in the artificial intelligence (AI) sector, estimating they could yield up to $8 in earnings for every dollar invested in chip providers like Nvidia.
Wood has substantiated her belief by investing in AI startups such as xAI, OpenAI, and Anthropic through Ark Venture Fund. Her commitment is further demonstrated by Ark's ownership of leading AI software stocks like Amazon and Tesla in its ETFs.
If Wood's prediction regarding AI software companies proves correct, C3.ai and Microsoft are likely to emerge as top beneficiaries in the coming years.
1. Why C3.ai might shine
C3.ai was the world's pioneering enterprise AI company when it was established in 2009. It now offers over 100 readymade AI applications for businesses, aiding them in hastening the adoption of groundbreaking technology. C3.ai's software has particular traction in industries not traditionally associated with technology, like energy, manufacturing, and finance services.
Dow, a prominent chemical manufacturer worldwide, uses C3.ai's Reliability application to track equipment and perform predictive maintenance, reducing downtime by 20%. Similarly, a multinational bank implemented the C3.ai Anti-Money Laundering application to detect fraud, resulting in a 200% increase in the number of correctly identified suspicious transactions.
C3.ai directly sells its applications to customers but also collaborates with prominent cloud providers, including Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. Its integration with these platforms utilizes their computing power to offer customers the required performance. Given that most businesses use one of these three cloud providers, adopting C3.ai's applications is incredibly straightforward.
During C3.ai's fiscal 2025 second quarter (Oct. 31 end), 62% of its deals were sealed through its partnership network, underscoring its importance as a key sales channel.
C3.ai reported a record $94.3 million in revenue during the quarter, marking a 29% increase from the previous year and the seventh consecutive quarter of accelerating growth. This surge in revenue is a direct result of a shift in its business model from subscription-based revenue to consumption-based revenue two years ago, simplifying the onboarding process and allowing customers to sign up at unparalleled speed.
As AI adoption grows, more businesses will seek out providers of pre-built solutions like C3.ai. This trend points to this company as an excellent AI stock for investors to hold in the long term.
2. Why Microsoft could thrive
Microsoft's rich history of innovation, which includes the creation of the Windows operating system, Azure cloud platform, and 365 productivity applications, has also established it as a prominent AI software player. Its $14 billion investment in ChatGPT creator OpenAI opened doors to the development of its Copilot AI assistant, now integrated into most flagship software apps.
Copilot for 365 can significantly boost productivity by assisting users in creating text and image content in Word and PowerPoint. It can also answer complex questions, aiding research processes. The notable adoption of Copilot for 365 by Fortune 500 companies and a marked surge in daily usage in fiscal 2025's first quarter demonstrates its appeal.
Microsoft also offers Azure AI for its cloud customers, providing them with cutting-edge computing infrastructure to develop AI software. Additionally, it offers access to industry-leading large language models (LLMs), including OpenAI's latest o1 series. Despite high demand for its AI data center infrastructure, Microsoft is committed to bolstering capacities, investing around $20 billion in Q1's spend, which is likely to escalate in the future quarters.
While Microsoft's current valuation might seem steep, trading at a P/E ratio of 36.2, a 10% premium to its 10-year average of 32.8, it remains a possible value proposition for investors prepared to hold the stock for the next year. As illustrated by the orange line in the following chart, its forward P/E ratio, based on the consensus earnings estimate from Wall Street for the upcoming year, is 29.2:
In summary, even though Microsoft stock might appear costly today, it could represent significant value for those willing to hold onto it for at least a year.
If Ark Invest's Cathie Wood is correct and AI software yields an impressive $8 in earnings for every $1 spent on semiconductors, the future rewards from Microsoft's data center investments could soar to hundreds of billions of dollars. Under such circumstances, it becomes challenging to overlook Microsoft's stock as a standout choice in the AI software sphere.
- Given Cathie Wood's conviction about the potential earnings from AI software companies, Microsoft's significant investment in AI technology through its chatbot assistant, Copilot, and Azure AI could position it as a lucrative investment opportunity in this sector.
- With Ark Investment Management's focus on forward-thinking tech stocks and Cathie Wood's belief in the potential of the AI sector, investors might find Microsoft's robust AI offerings, such as Azure AI and Copilot, as attractive additions to their portfolios in the realm of AI finance and investing.