Cathie Wood's AI Software Bets: Billionaire-Backed Stocks in Focus

Cathie Wood Says Software Is the Next Big AI Opportunity -- 2 Super Stocks You'll Wish You'd Bought Today If She's Right | The Motley Fool

Chip stocks like Nvidia are soaking up most of the value created by artificial intelligence (AI) right now, but software stocks could present an even greater opportunity. Ark Investment Management operates several private funds as well as multiple public exchange-traded funds (ETFs) that invest in innovative technology stocks. Last year, Ark CEO Cathie Wood said software companies will be the next big opportunity in the artificial intelligence (AI) industry, predicting the companies will generate $8 in revenue for every $1 spent on chips from suppliers like Nvidia. Since Wood made that prediction, the Ark Venture Fund has piled into several private AI software companies like Anthropic, OpenAI, and Elon Musk's xAI. Plus, Ark's ETFs own several AI-related software stocks including Palantir Technologies, UiPath, and Tesla. If Wood is right about AI software, there could be an exciting list of winners over the long term. Here's why Amazon (AMZN 3.71%) and Meta Platforms (META 0.60%) might be two of the biggest. Amazon might be one of the most diverse AI companies in the world. It's using the technology in its flagship e-commerce business, its advertising business, and, most importantly, its cloud computing segment led by Amazon Web Services (AWS). AI powers the recommendation algorithm on Amazon.com, which learns what each customer likes so it can show them similar products to boost sales. Customers can also use a virtual shopping assistant called Rufus, which is trained on Amazon's product catalog so it can answer questions and offer recommendations. Plus, Amazon just launched a new tool for its fulfillment centers called Project Private Investigator, which uses AI to identify faulty products before they are sent to customers. But AWS is home to an even more exciting set of AI initiatives. Not only is Amazon designing its own data center chips to offer developers a more cost-effective alternative to Nvidia's hardware, but the tech giant also developed its own family of large language models (LLMs) called Titan. These LLMs are multimodal, which means developers can customize them to create their own generative AI software applications that are capable of generating text, images, and more. Titan is accessible on the Bedrock platform in AWS, along with LLMs from several leading third-party AI start-ups like Anthropic. Finally, AWS launched a virtual assistant called Amazon Q last year, which is capable of debugging and generating computer code to accelerate the pace of software development. Amazon CEO Andy Jassy says Q is the most capable AI tool of its kind because it has the highest known acceptance rate for code suggestions, and it catches more security vulnerabilities than any competing product. AWS alone generated a record $26.2 billion in revenue during the recent second quarter of 2024 (ended June 30), which was a 19% increase from the year-ago period. It marked the third consecutive quarter of accelerating growth, thanks in large part to demand for AI. Amazon is one of the most attractively valued members of the trillion-dollar club, and if Cathie Wood is right, its stock could deliver spectacular returns for investors in the coming years. Meta is the parent company of popular social media platforms like Facebook, Instagram, WhatsApp, and Messenger. Together, they serve more than 3.2 billion people every single day, and AI is playing an increasingly important role in the user experience. Facebook and Instagram, for example, have evolved from social networks into entertainment platforms, with AI-powered algorithms showing each user the most relevant posts, even if they weren't shared by someone they know. This is increasing the amount of time users spend on Meta's family of apps, which means they view more ads and drive more revenue for the tech giant. Meta continues to deliver new innovations for its advertisers, too. They can use AI to create engaging text and image content for their ads, which is great for businesses that don't have an in-house marketing team. But the process will become even easier over time. Eventually, businesses will be able to tell Meta their advertising budget and their objective, and its AI engine will autonomously handle everything from crafting the ad to selecting the target audience. Meta also developed its own open-source LLM called Llama. It just launched Llama 3.1, the most advanced version so far, with 405 billion parameters. The company says it's already competitive with most other leading models, but CEO Mark Zuckerberg is already focusing on Llama 4, which he says will set the bar for the industry next year. Llama is at the foundation of many AI features in Meta's pipeline, so it's key to the company's strategy. Meta AI is one of those features. It's a user-facing AI assistant, which is now accessible in the chat and search functions across all of the company's apps. It can accurately answer questions on a broad range of topics, and it can be prompted to generate text and image content. It also lays the groundwork for Business AI, which could be a big revenue driver for Meta in the future. Zuckerberg believes every business will have its own AI agent capable of handling customer queries and even processing sales. Meta stock is trading near an all-time high right now, but it's still attractively valued relative to its big-tech peers. It trades at a price-to-earnings (P/E) ratio of just 26.7 as of this writing, which is about 17% cheaper than the 32 P/E ratio of the Nasdaq-100 technology index. Given the P/E discount, this could be a great entry point for long-term investors, especially if Cathie Wood proves to be right.

3 Billionaire-Held Stocks to Buy Now | The Motley Fool

These professionals have placed big bets on these tech stocks. When looking at the top bets of some of the most prominent billionaire investors, there is a common theme that stands out. These professionals are favoring highly profitable companies that dominate their industry. Most importantly, they are investing in the stocks that trade at reasonable valuations relative to future growth expectations. Stephen Mandel of Lone Pine Capital, Chase Coleman of Tiger Global Management, and Andreas Halvorsen of Viking Global Investors have had successful investing careers, with their net worth ranging from $2.5 billion to $7 billion, according to Forbes. Let's look at these firms' largest holdings at the end of the second quarter and why investors should expect outstanding returns from these stocks over the next few years. Lone Pine Capital manages over $16 billion in assets. Its largest holding at the end of the second quarter was leading chip maker Taiwan Semiconductor Manufacturing (TSM 1.51%), also commonly known as TSMC. TSMC is a widely held tech stock among the most successful investment firms. The company enjoys a lucrative position as the world's top chip foundry. It manufactures chips for Nvidia, Advanced Micro Devices, Intel, and a host of other semiconductor companies and commands over 60% share of the global foundry market. TSMC gives investors broad exposure to the trends driving growth in the semiconductor industry without the additional risks of picking the winners and losers among the Nvidias and Intels of the world. TSMC's advantages in advanced chipmaking positions it well for growth as companies invest in powerful chips to handle the demanding workloads of artificial intelligence (AI) training. The demand for high-performance chips drove a 32% year-over-year increase in revenue last quarter, and it should continue that momentum into 2025. Management expects strong results in the near term driven by improving chip demand for smartphones and AI. Strong top-line growth should pad profits, as TSMC generates a high operating margin of 45% relative to revenue. This will fund the company's plan to spend at least $30 billion this year in capital expenditures to support long-term demand for advanced chip technologies. Wall Street analysts expect the company's earnings to grow at an annualized rate of 26% over the next several years. With the stock likely to continue trading at its current forward price-to-earnings (P/E) ratio of 26, investors could earn a return on par with those estimates. Meta Platforms (META 0.60%) estimates there are 3.2 billion people that use its family of apps every day. This is a strong advantage in the digital advertising market, which is how the company makes money. Chase Coleman's Tiger Global Management has held a large stake in the social media leader since 2018, and it held $3.7 billion worth of shares in the second quarter, making it the firm's largest holding. Meta AI is already having a big impact on the user experience in Facebook and Instagram. The company's AI models improved the quality of recommendations, which can have a big impact on the time spent on these platforms. As a result, ad impressions and price per ad were up 10% year over year last quarter, and that drove a strong revenue increase of 22% over the year-ago quarter. Strong revenue growth will provide more profit for Meta to reinvest in advanced AI models and, therefore, keep the positive cycle of growth going. "We had a strong quarter, and Meta AI is on track to be the most-used AI assistant in the world by the end of the year," CEO Mark Zuckerberg said. Meta is a highly profitable business. It generated a profit of $51 billion on $149 billion of revenue over the last four quarters. Management plans to spend between $37 billion and $40 billion on capital expenditures this year, with a significant increase expected in 2025. This spending will support AI research and other products for long-term growth. Wall Street analysts expect Meta to post annualized earnings growth of 17% in the coming years. Assuming the stock continues to trade at the same P/E, that's enough growth for the shares to double in value within the next five years. Amazon (AMZN 3.71%) is a powerful brand in e-commerce and the enterprise space with the Amazon Web Services (AWS) cloud computing business. It generates most of its $604 billion in trailing 12-month revenue from retail-related services, including advertising, but around two-thirds of its operating profit comes from cloud services. Viking Global Investors held $1.8 billion worth of Amazon stock in Q2, making it the firm's largest holding, and it added significantly to its stake in the quarter. "We're continuing to make progress on a number of dimensions, but perhaps none more so than the continued reacceleration in AWS growth," CEO Andy Jassy said in the second-quarter earnings report. Amazon is benefiting from companies migrating their on-premise data systems to the cloud, and a big incentive for this migration in 2024 is taking advantage of AI services. AWS revenue increased 19% year over year last quarter, and Amazon should see this momentum continue. Amazon offers tools to help customers build their own AI applications with Amazon Bedrock, in addition to its proprietary AI chips like Trainium, to provide more cost-efficient computing power for AI training. Amazon's increasing AI capabilities position it well in a cloud market expected to reach $774 billion, according to Statista. Wall Street analysts expect the company's earnings to increase at a 23% annualized rate. Investors should expect the stock to command a premium P/E multiple and hit new highs for years to come.