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Cathie Wood Says Software Is the Next Big AI Opportunity — 2 Super Stocks You’ll Regret Not Buying if She’s Right

In Business
June 11, 2024

Cathie Wood is the head of Ark Investment Management, which operates eight exchange-traded funds (ETFs) focused on innovative technology stocks. Last year, she said software companies will likely be the next big opportunity in artificial intelligence (AI), predicting they could generate $8 in revenue for every $1 spent on hardware from chip giants like Nvidia.

Since making that prediction, Wood has piled into several AI software opportunities. The Ark Venture Fund recently bought shares in private companies like ChatGPT creator OpenAI, Claude creator Anthropic, and Elon Musk’s xAI. Plus, Tesla is the largest holding in the flagship Ark Innovation ETF because Wood believes its autonomous self-driving software is the biggest AI opportunity in the world.

If Wood is right about AI software, a number of other stocks could deliver spectacular returns in the coming years. Here’s why investors might want to buy shares in Palo Alto Networks (NASDAQ: PANW) and C3.ai (NYSE: AI).

1. Palo Alto Networks: A leader in AI-based cybersecurity

Palo Alto Networks has observed a tenfold increase in the frequency of cyber attacks like phishing emails over the past year. AI makes it easy for malicious actors to craft realistic content designed to trick corporate employees into handing over sensitive information. Unfortunately, over 90% of security operations centers (SOCs) still rely on human-led processes, meaning 23% of incidents are left uninvestigated because they can’t keep up with the sheer volume.

AI-powered cybersecurity helps solve that problem, because it automates threat detection and incident response. Palo Alto offers a large portfolio of AI tools for cloud security, network security, and security operations. For example, the company launched the Cortex XSIAM platform last year, which is designed to automate the SOC, and it’s delivering powerful results for customers.

For one oil and gas company, XSIAM reduced the number of incidents requiring human investigation by 75%. For another customer with a service-based business, XSIAM reduced the time it takes to respond to incidents from three days to just 16 minutes. Simply put, fewer security alerts slip through the cracks thanks to this platform, and it significantly reduces the workload on human employees.

Palo Alto generated $2.0 billion in revenue during the recent fiscal 2024 third quarter (ended April 30), which was a 15% increase from the year-ago period. That marked a slowdown, sequentially and year over year, which is expected to be temporary, mainly because the company is shifting its business model toward “platformization.”

Palo Alto customers who use all three of its platforms (cloud, network, and operations) have a lifetime value 40 times higher than those using just one. Therefore, the company is targeting customers who have contracts with competing vendors by giving them products for free until those contracts expire. At that time, they can consolidate their cybersecurity stack with Palo Alto, which makes them significantly more valuable over the long term.

By the end of fiscal 2024, the company expects to have $4.1 billion in annual recurring revenue from such customers, which will be a 39% increase from the previous year. By fiscal 2030, it plans to more than triple that figure to $15 billion, so now might be a great time to buy in ahead of that growth phase.

2. C3.ai: An enterprise AI company with accelerating growth

C3.ai was founded in 2009, long before the AI hype train left the station. It’s an enterprise AI company that has developed over 40 ready-made applications for businesses in 19 different industries. They allow those customers to integrate AI more quickly and at a lower cost compared to developing the technology themselves.

C3.ai’s applications are especially popular with non-technology companies like those in the energy, financial services, and manufacturing industries. Banks, for example, use C3.ai’s Smart Lending application to assess the creditworthiness of potential borrowers, and they use C3.ai’s Anti-Money Laundering application to autonomously detect suspicious transactions and fraud.

Chemical manufacturing giant Dow Inc. is using C3.ai’s Reliability application for predictive maintenance, which has reduced downtime in steam cracking equipment by 20%. Less downtime equals more money saved, which instantly enhances profitability.

C3.ai had 487 customer engagements in its fiscal 2024 fourth quarter (ended April 30), which was a whopping 70% increase from the year-ago period. It highlights how quickly demand for AI is growing in the corporate sector. It translated to a record-high $86.6 million in revenue during Q4, up 20% year over year, marking the fastest growth in almost two years.

It was also the fifth consecutive quarter of accelerated growth, and management’s forecast for the fiscal 2025 first quarter (ending July 31) points to an even faster revenue increase of up to 23%. The company is reaping the rewards of a transition to consumption-based revenue (from subscription-based) it made two years ago, which allows customers to sign up more easily and quickly scale their spending. In other words, C3.ai’s top-line results should continue to improve.

The company lost $14 million on a non-GAAP (adjusted) basis in Q4 because it’s still investing heavily in growth initiatives, but it has a solid balance sheet with $750 million in cash and equivalents that can sustain its current posture well into the future. If Wood is right, investors with a long-term horizon of at least five years might do extremely well owning this stock.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Palo Alto Networks, and Tesla. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.

Cathie Wood Says Software Is the Next Big AI Opportunity — 2 Super Stocks You’ll Regret Not Buying if She’s Right was originally published by The Motley Fool

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