Cathie Wood says software is AI’s next big opportunity — if she’s right, here are 2 super stocks I wish I’d bought today

Cathie Wood, CEO of Ark Investment Management, which runs several private and exchange-traded funds focused on innovative technology stocks, said last year that software companies are the next big opportunity for the artificial intelligence industry, predicting that they will eventually generate $8 in revenue for every $1 spent on chips from major suppliers. NVIDIA.

Since making that decision, Wood has put his money into several AI-related investment opportunities. Ark Ventures recently bought stakes in private companies including ChatGPT developer OpenAI, Elon Musk’s xAI, and Antropic. Ark’s ETFs have also added net positions in the following AI stocks this year: Tesla, UI Passand Palantir Technologies.

If Wood is right about AI software, we could see a compelling list of long-term winners, and here’s why. Datadog (D.D.O.G. 1.64%) and Palo Alto Networks (PANW 0.56%) Probably the two biggest ones.

1. Datadog: Pick and Shovel AI

If you ran a retail store 20 years ago, you would have relied on your salespeople to gauge customer satisfaction. But in the faceless world of online shopping, customer satisfaction is much harder to gauge. Datadog’s cloud platform is designed to monitor your digital infrastructure 24/7, instantly alerting administrators to technical glitches so they can be fixed before they negatively impact customer experience.

Datadog has 28,000 clients across retail, entertainment, healthcare, financial services, and more. Simply put, any business with a digital presence, customer-facing or not, can benefit from Datadog’s cloud monitoring technology to instantly find the root cause of technical issues and reduce downtime.

Last year, Datadog decided to apply its expertise to the AI ​​industry. The company’s new Large Language Model (LLM) monitoring platform helps developers diagnose problems quickly, track chatbot response quality to improve performance, and monitor consumption to control costs. Just as many cloud-dependent companies use monitoring tools, the platform could become an essential tool for any company developing AI.

Datadog also offers monitoring tools for developers who use OpenAI’s off-the-shelf LLM. Datadog’s tools can track OpenAI usage across an organization, allowing administrators to understand which departments are consuming the most, helping them control costs and compute workloads to maintain optimal performance.

Datadog expects to generate $2.6 billion in total revenue in 2024. As of the first quarter (ending March 31), about 3.5% of the company’s revenue came from AI customers, up from 3% just three months earlier. If current growth rates continue, that figure could exceed 5% by the end of the year, meaning Datadog could make $130 million in revenue from AI alone.

While this number may sound small, keep in mind that it was effectively zero in Q1 2023. It’s entirely possible that AI will become a significant contributor to Datadog’s financial results within the next five years as more companies adopt AI and need monitoring tools to protect their technology investments. As a result, Datadog stock is a great way to get in on the AI ​​software boom that Cathie Wood predicts.

2. Palo Alto Networks: A leader in AI-powered cybersecurity

Cybersecurity is now a top priority for many business executives, especially following the global IT outage caused by a popular provider last week. CrowdstrikeCrowdStrike is Palo Alto’s biggest competitor, so this could be an opportunity to win contracts from disgruntled customers.

Palo Alto operates three platforms: Cloud Security, Network Security, and Security Operations. The company is working to incorporate AI into each platform to help customers address modern threats. According to Palo Alto, 93% of organizations still rely on human-driven processes in their security operations centers, and 23% of incidents go uninvestigated because administrators are unable to handle the sheer volume of threats.

Palo Alto’s Cortex XSIAM product brings AI-powered automation to security operations centers. One customer, Imagine Technologies, uses automation to resolve 100% of their security incidents, up from less than 10% before XSIAM. Boyne Resorts has seen similar success, reducing incident resolution time by an astounding 98%, from three days to just 1.7 hours.

Until now, without a true single-vendor solution, companies have pieced together cybersecurity stacks from different providers. Palo Alto is looking to change that, as customers who adopt all three of its platforms (a complete solution) have 40 times higher lifetime value than customers who use just one. To entice customers to move all their spend to Palo Alto, the company is offering fee-free periods to help them follow through on existing contracts with other vendors.

While this will impact Palo Alto’s revenue growth in the short term, it could lead to big benefits in the future: The company expects to generate $4 billion in revenue from “platformized” customers in fiscal 2024 (ending July 31), but plans to bring in another $1 billion in revenue in fiscal 2025. triple That number is expected to reach $15 billion per year by 2030.

So if Cathie Wood’s prediction is correct, Palo Alto could be one of the best AI software stocks investors can buy. The company is one of the few that has already successfully monetized AI and has a clear plan to generate significant financial growth over the long term.