Earlier this year, Cathie Wood's Ark Investment Management released a set of forecasts on the potential of artificial intelligence (AI). The firm, which operates eight exchange-traded funds (ETFs) focused on different areas of technology, suggests AI could add a whopping $200 trillion to the global economy by 2030.
Ark says much of that added economic output will be driven by a productivity explosion for businesses using AI. It's capable of speeding up software programming, medical discoveries, and even insurance claims. Semiconductor companies like Nvidia have reaped most of the early financial benefits from AI because data center hardware is integral to AI's operations.
In a recent interview with Bloomberg TV, Wood said the next big AI opportunity is likely to be software. She estimates for every $1 in chip hardware Nvidia sells, software companies will generate $8 in revenue. According to Ark's forecasts, those software companies could reap a combined $14 trillion in revenue by the end of this decade.
Below, I'll share two stocks you'll wish you had bought today if Wood's prediction comes true.
Image source: Tesla.
1. Tesla: More than just an EV company
Tesla (TSLA -1.11%) leads the electric vehicle (EV) industry in sales worldwide, and it expects to manufacture 1.8 million cars this year alone, with production set to reach 20 million cars annually by 2030, according to CEO Elon Musk.
But Tesla's greatest financial opportunity might actually be in software because those EVs will serve as a platform for the company's autonomous full self-driving (FSD) technology. Tesla's efforts in that area lead the industry. An estimate by Ark Invest suggests there are more than 2.7 million Tesla EVs on the road testing the beta version of FSD, a number that is 10 times more than its nearest competitor.
In Tesla's Q2 earnings call with investors, Musk said those vehicles had collectively driven more than 300 million miles to date, which gives Tesla mountains of data with which to further train its AI models. Musk thinks the company can monetize FSD in a few ways:
- Tesla will earn subscription revenue from its customers.
- The company has talked about licensing FSD software to other car companies.
- Musk wants to build a ride-hailing network like Uber's but without human drivers.
The third option could be a substantial revenue opportunity. Musk says passenger vehicles only spend about 12 hours per week on the road, which means they are seriously underutilized. Tesla customers could earn extra income by lending their cars to the company's autonomous ride-hailing network when they're not in use (and that income would be split with Tesla).
In the recent second quarter, Tesla earned a gross profit margin of 18.2% from the production of each vehicle. But Musk says that gross margin could soar to over 70% in the long run thanks to the additional revenue streams created by FSD software. As a result, he thinks Tesla could theoretically sell each vehicle at cost, undercutting all of its competitors in the EV space, and still make tons of money on the software side of the business.
Ark Invest is a huge believer in the company's software-focused future. The firm estimates Tesla could be worth $6.1 trillion by 2027 on the back of autonomous vehicles, and since it's currently valued at just $784 billion, that implies its stock price will surge 799% between now and then.
If Ark is right about AI software, Tesla is one company you'll want to own a stake in for the long run.
2. C3.ai: A pioneer in enterprise artificial intelligence
C3.ai (AI 3.02%) is far smaller than Tesla, with a valuation of just $3 billion as of this writing. Its stock has been extremely volatile since it was listed publicly in 2020. After reaching an all-time high of $161 per share, it plunged 93% to just $10.16, and it now trades at $25.50. The point is, C3.ai might present more risk than many inventors are comfortable with, but if the company can execute on its strategy, it could also create substantial value in the long term.
C3.ai is a pioneer of the enterprise AI industry. It was one of the first companies to sell ready-made AI software, and it has built a portfolio of over 40 applications designed for businesses in several industries, including financial services, manufacturing, and oil and gas.
American multinational Koch Industries uses C3.ai to monitor 300 different assets, and the technology produces 4 million predictions per month to resolve equipment issues and manage its supply chains more effectively. Similarly, the Defense Department is using C3.ai to improve readiness and decision-making; it's driving a 25% increase in overall aircraft mission capability and enormous cost savings thanks to accelerated predictive maintenance.
C3.ai integrates with most major cloud platforms, and the company even sells its applications in partnership with leaders like Amazon Web Services and Microsoft Azure. Cloud providers are racing to deliver the most advanced AI tools to their business customers, and they will be key distributors of C3.ai's technology as AI adoption explodes over the long run.
The company has experienced a slowdown in revenue growth recently because it's transitioning away from a subscription-based sales model. Subscriptions take time to negotiate, so onboarding customers can be a slow and laborious process. Instead, C3.ai has begun selling its software on a consumption basis so customers only pay for what they use, which means they can sign up far more quickly.
The company is in the early ramp-up phase of this transition, and based on its projections, revenue growth should begin to accelerate roughly 12 months from now. In fiscal 2023 (ended April 30), C3.ai's revenue grew by just 5%. But the company's guidance suggests it could accelerate to 20% in fiscal 2024, with the expectation it will move higher from there in fiscal 2025.
As a result, now might be a great time for investors to buy C3.ai stock in anticipation of far better times ahead. However, as I touched on earlier, it will be important to have a high tolerance for risk because history suggests owning this stock won't be a smooth ride.
