Cathie Wood is the head of Ark Investment Management, which manages eight exchange-traded funds (ETFs) focused on innovative technology stocks. Last year she said software companies were likely to 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 this prediction, Wood has looked into various possibilities for AI software. The Ark Venture Fund recently bought shares in private companies such as ChatGPT maker OpenAI, Claude maker Anthropic and Elon Musk’s xAI. Plus, Tesla is the largest holding company in the flagship Ark Innovation ETF because Wood believes its autonomous, self-driving software is the world’s greatest AI opportunity.
If Wood is right about AI software, a number of other stocks could deliver spectacular returns in the coming years. This is why investors might want to buy shares Palo Alto Networks (NASDAQ: PANW) And C3.ai (NYSE: AI).
1. Palo Alto Networks: A Leader in AI-Based Cybersecurity
Palo Alto Networks has seen a tenfold increase in the frequency of cyber attacks, such as phishing emails, in the past year. AI makes it easy for malicious actors to create realistic content designed to trick company employees into handing over sensitive information. Unfortunately, more than 90% of Security Operations Centers (SOCs) still rely on human-led processes, meaning 23% of incidents go 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, last year the company launched the Cortex XSIAM platform, which is designed to automate the SOC, 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-oriented business, XSIAM reduced the time it takes to respond to incidents from three days to just 16 minutes. Simply put, this platform means fewer security alerts slip through the cracks and significantly reduces the workload for human workers.
Palo Alto generated $2.0 billion in revenue during the recent fiscal third quarter of 2024 (ended April 30), which was a 15% increase from the year-ago period. That marked a slowdown, sequentially and year-on-year, that is expected to be temporary, especially as the company shifts its business model to “platformization.”
Palo Alto customers using all three platforms (cloud, network and operations) have a lifetime value that is 40 times higher than customers using just one platform. That’s why the company targets customers who have contracts with competing suppliers by offering them free products until those contracts expire. At that point, they can consolidate their cybersecurity stack with Palo Alto, making them significantly more valuable in the long run.
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 year 2030, it plans to more than triple that amount to $15 billion, so now could be a good time to buy ahead of that growth phase.
2. C3.ai: An AI company for accelerating growth enterprises
C3.ai was founded in 2009, long before the AI hype train left the station. It is an enterprise AI company that has developed more than 40 turnkey applications for companies across 19 different industries. They enable these customers to integrate AI faster and at a lower cost compared to developing the technology themselves.
C3.ai’s applications are especially popular with non-technology companies such as those in the energy, financial services and manufacturing industries. For example, banks 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 independently detect suspicious transactions and fraud.
Chemical manufacturing giant Dow Inc. uses C3.ai’s Reliability application for predictive maintenance, reducing steam cracking equipment downtime by 20%. Less downtime equals more money saved, which immediately improves profitability.
C3.ai had 487 customer engagements in the fourth quarter of fiscal 2024 (ended April 30), which was a whopping 70% increase from the same period a year ago. It shows how quickly the demand for AI in business is growing. This translated into record high revenue of $86.6 million in the fourth quarter, 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 first quarter of fiscal 2025 (ending July 31) points to even faster revenue growth of up to 23%. The company is reaping the benefits of the transition to consumption-based (from subscription) revenue it made two years ago, making it easier for customers to sign up and scale their spending faster. In other words, C3.ai’s top results should continue to improve.
The company lost $14 million on a non-GAAP (adjusted) basis in the fourth quarter as it continues to invest heavily in growth initiatives, but it has a solid balance sheet with $750 million in cash and equivalents that will sustain its current position well into the can maintain in the future. If Wood is right, investors with a long-term horizon of at least five years would do very well to own this stock.
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Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds and recommends positions in 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 Originally published by The Motley Fool
