Ark Investment Management operates several exchange-traded funds (ETFs) focused on innovative technology stocks. Its founder, Cathie Wood, believes software companies are the next big opportunity in the artificial intelligence (AI) industry, predicting they could generate up to $8 in revenue for every $1 they spend on chips from suppliers like Nvidia.
Wood has invested in AI start-ups like xAI, OpenAI, and Anthropic through the Ark Venture Fund since making that prediction last year, so she's backing up her words with decisive action. Moreover, Ark's various ETFs own several leading AI software stocks like Amazon and Tesla.
If Wood proves to be right about AI software companies, here's why C3.ai (AI -4.26%) and Microsoft (MSFT -1.73%) might be two of the biggest winners in the coming years.
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1. The case for C3.ai
C3.ai was the world's first enterprise AI company when it was founded in 2009. Now, it offers over 100 ready-made AI applications for businesses, which can help them accelerate their adoption of this revolutionary technology. C3.ai's software is especially popular in industries that aren't normally known for developing cutting-edge technology, like energy, manufacturing, and financial services.
Dow, which is one of the world's largest manufacturers of chemicals, uses the C3.ai Reliability application to monitor equipment and conduct predictive maintenance. It has reduced downtime by 20% so far, which translates to fewer costs and more revenue. Similarly, one multinational bank deployed the C3.ai Anti-Money Laundering application to detect fraud, and it resulted in a 200% increase in the number of correctly identified suspicious transactions.
C3.ai sells its applications directly to customers, but it also has joint sales agreements with the three major cloud giants, Amazon Web Services, Microsoft Azure, and Alphabet's Google Cloud. C3.ai integrates with those platforms and leverages their computing power to give customers the performance they need. Since most businesses already use one of those three cloud providers, it's extremely easy for them to adopt C3.ai's applications.
During C3.ai's fiscal 2025 second quarter (ended Oct. 31), 62% of its deals were closed through its partnership network, so it's a critical sales channel for the company.
C3.ai generated a record $94.3 million in revenue during the quarter. That was a 29% increase from the year-ago period, and it marked the seventh consecutive quarter of accelerating growth. The company is reaping the benefits of a change to its business model from two years ago, when it switched from subscription-based revenue to consumption-based revenue. It streamlined the onboarding process by eliminating lengthy negotiating processes, so customers can sign up faster than ever.
Developing AI is expensive, and it requires specialized expertise that many companies don't have. Therefore, as AI adoption spreads, more enterprises will turn to providers of ready-made solutions like C3.ai. That's why this could be a great AI stock for investors to own for the long term.
2. The case for Microsoft
Microsoft has a rich history of innovation that led to the creation of a broad portfolio of software products like the Windows operating system, Azure cloud platform, and 365 productivity applications (Word, Excel, and PowerPoint). The company is also a leader in AI software, thanks to its near-$14 billion investment in ChatGPT creator OpenAI.
The partnership -- which dates back to 2019 -- paved the way for Microsoft to launch the Copilot AI assistant, which is now embedded into most of its flagship software apps. Copilot for 365, for example, can help users rapidly create text and image content in Word and PowerPoint, which can significantly boost their productivity. It can also answer complex questions, which is very useful when conducting research.
Organizations around the world pay for more than 400 million 365 licenses for their employees, and each of them is a candidate to add Copilot for an additional monthly subscription fee. Microsoft says 70% of the Fortune 500 companies are using Copilot for 365 already, and the number of people who use it daily more than doubled in the first quarter of fiscal 2025 (ended Sept. 30).
Microsoft also created Azure AI for its cloud customers. It allows businesses to access state-of-the-art computing infrastructure to develop AI software, and it also provides them with access to industry-leading large language models (LLMs), including OpenAI's latest o1 series. Microsoft says demand is outstripping supply for its AI data center infrastructure, but the company spent around $20 billion to build more capacity during Q1. That spending is likely to ramp up in the coming quarters.
Valuation might be one drawback to buying Microsoft stock right now. It trades at a price-to-earnings (P/E) ratio of 36.2, which is a 10% premium to its 10-year average of 32.8. However, as represented by the orange line in the below chart, its forward P/E ratio (based on the consensus earnings estimate from Wall Street for the next year) is 29.2:
MSFT PE Ratio data by YCharts
In other words, even though Microsoft stock is technically expensive today, it might actually be cheap for investors who are willing to hold it for at least the next year.
If Cathie Wood is right and AI software generates $8 in revenue for every $1 companies spend on chips, the potential payoff from Microsoft's data center infrastructure investments could be in the hundreds of billions of dollars in the future. As a result, it's hard to look past Microsoft stock as one of the top AI software plays.
