Artificial intelligence (AI) has already proven its ability to substantially increase productivity for businesses. According to Ark Investment Management, which is run by tech investor Cathie Wood, that productivity boost could add a whopping $200 trillion to global economic output by 2030.
Investors have been feverishly buying shares of Nvidia to get in on the action because the company makes the most advanced semiconductors used in data centers to develop and train AI models. Its stock has soared by 184% in 2023 so far, crushing the benchmark S&P 500 stock market index, which is up just 16% year to date.
But in an interview with Bloomberg TV earlier this year, Wood said the next big AI opportunity for investors might be in software companies instead. They could potentially generate $8 in revenue for every $1 in chip hardware Nvidia sells, purely because AI has the potential to help businesses operate at a scale never before seen.
Below, I'm going to share four stocks operating in the AI software space that could help investors crush the broader market in the long run.
Image source: Getty Images.
1. Tesla
That's right, Tesla (TSLA -1.11%) isn't just the world's largest electric vehicle manufacturer. Cathie Wood actually believes this company is the biggest AI play around, thanks to its fully autonomous self-driving software. Tesla plans to sell the software to its customers, but CEO Elon Musk has also discussed the possibility of licensing it to other automakers, which would open an entirely new revenue stream.
But that's not all. Musk says the average passenger vehicle is only used 12 hours per week and spends most of its time parked. As a result, he plans to develop a ride-hailing network in which Tesla customers could lend their autonomous vehicles to earn revenue during that downtime. Proceeds would be split between the customer and Tesla, and Musk says this could help boost the company's gross profit margin per vehicle to over 70% in the long term (from 25% today).
Simply put, self-driving software could transform Tesla's economics. It forms the basis of Ark Invest's prediction that its stock will climb to $2,000 by 2027. That would mark an 824% gain from where it trades today, and it would give the company a $6 trillion valuation. If Ark is right, Tesla stock will obliterate the return of the broader market, at least as far as any historical average is concerned.
2. Microsoft
Few investors would have associated Microsoft (MSFT 1.82%) with AI prior to 2023, but thanks to sizable investments in companies like OpenAI and Builder.ai, it's quickly becoming the largest distributor of the technology. Microsoft has integrated OpenAI's ChatGPT chatbot into its Bing search engine and its Office 365 document suite to boost productivity and transform the way its customers seek information.
In the fiscal 2023 fourth quarter (ended June 30), the company said users had completed over 1 billion chats and generated 750 million images on the new ChatGPT-powered Bing. Now, Microsoft is offering it as an enterprise software solution suitable for use in the workplace, allowing employees to delegate some of their workload to AI.
But the cloud is where Microsoft's AI portfolio really comes to life. Its Azure platform now offers its business customers a choice of several large language models for them to build upon, from Meta Platforms' LLaMA 2 open-source model to OpenAI's latest GPT-4. The Azure OpenAI Service alone had 11,000 customers in the recent quarter, up from just 2,500 three months prior, so uptake has been rapid.
Azure was responsible for more than half of Microsoft's $110 billion in cloud revenue during the fiscal year 2023, and it was one of the fastest-growing parts of the entire company. It has helped propel Microsoft stock to a 34% gain in 2023, which is double the return of the S&P 500, and if the company remains a leader in AI, investors should expect that outperformance to continue long into the future.
3. Amazon
Amazon (AMZN 3.43%) might be known as the world's largest e-commerce company, but it's also home to the world's largest cloud computing platform, Amazon Web Services (AWS). It leads second-placed Azure by revenue, number of customers, and breadth of functionality. Naturally, AWS is therefore becoming a dominant provider of AI technology for businesses.
Amazon CEO Andy Jassy views AI as having three core layers, and the company is investing heavily in all of them. First, there's the data center computing hardware like AWS's EC2 P5 cloud infrastructure, which runs on the latest Nvidia H100 graphics (GPU) chips designed for AI workloads.
The second layer features large language models as a service. Jassy says AWS's business customers don't want to invest the resources in building their own models; they'd rather access existing ones and customize them. As a result, AWS offers several third-party options, and even one it developed in-house, called Titan.
The third and final layer features the software applications like ChatGPT, which most consumers and businesses are already familiar with. AWS currently offers applications like CodeWhisperer, which is a programming tool built on generative AI and is capable of writing computer code for developers.
Jassy says investors are far too focused on the third layer and not enough on the first two layers, where substantial financial opportunities exist, especially because Amazon has developed its own GPU chips to compete with Nvidia. That holistic, ground-up approach to AI is helping cement Amazon's position as a leader in the industry. As a result, Amazon's stock has a great shot at outperforming the broader market in the long run, particularly if Ark Invest's projections come to fruition.
4. C3.ai
I want to be very clear: C3.ai (AI 3.02%) is the riskiest play of this bunch. Its stock has surged 197% this year -- crushing even Nvidia -- but it's still down 79% from its all-time high. The company is worth just $3.8 billion, and it's still in the process of scaling its business, which comes with challenges. But it's a true AI software play that could deliver monster returns for investors in the long run.
C3.ai has a portfolio of more than 40 ready-made and customizable AI applications, which it sells to its 287 business customers (and growing). The applications do everything from detecting fraud for banks to predicting equipment failures for some of the world's largest oil and gas companies. C3.ai's AI technology is so good that leading cloud providers like Microsoft Azure and Amazon Web Services also offer it to their customers!
In fact, a business developing AI software using C3.ai on AWS can complete the project 26 times faster than using just AWS alone. It's because C3.ai reduces the amount of written code required by 99%, which is exactly the type of productivity boost Cathie Wood and Ark Invest reference in their future value predictions for AI.
But C3.ai has struggled to grow recently because it's currently in the middle of a transition from a subscription-based revenue model to a consumption-based one. Subscription agreements take time to negotiate, which means onboarding customers is a slow process. Under a consumption model, businesses can simply come and go as they please while only paying for what they use, which should pave the way for faster customer growth.
C3.ai's revenue growth has stalled while its customers convert to the new pricing structure. But from fiscal 2024 (ending April 30, 2024) onward, the company expects its revenue will return to annual growth of 20% as consumption scales. If that happens, it should pave the way for market-beating upside to C3.ai stock -- but investors should always expect volatility in a company this small, especially when it operates in a new industry like AI.
