Ark Investment Management, led by Cathy Wood, also known as "Wood Sister," operates eight exchange-traded funds (ETFs) focusing on innovative technology stocks. Last year, she stated that the software industry may be the next big opportunity in the field of artificial intelligence and predicted that every $1 sold$NVIDIA (NVDA.US)$By using AI hardware provided by chip giants, such as 8 to 21 dollars can be generated to drive the AI software.

Since making this prediction, Cathy Wood has invested in several artificial intelligence software companies. The Ark Venture Fund, a venture capital fund run by Cathy Wood, recently invested in private companies such as OpenAI, the creator of ChatGPT, the creator of Claude, and Elon Musk's xAI. In addition, Tesla is the flagship of the ARK Innovation ETF's largest holdings because Cathy Wood believes that Tesla's autonomous driving software is the world's largest artificial intelligence opportunity.

If Cathy Wood's view of artificial intelligence software is accurate, then other parts of the stock are likely to generate amazing returns in the coming years. Palo Alto Networks and C3.ai are worth paying attention to for the following reasons:

1.$Palo Alto Networks (PANW.US)$The leader in artificial intelligence network security

Palo Alto Networks has observed that the frequency of network attacks such as phishing emails has increased tenfold over the past year. Using artificial intelligence, malicious actors can easily create realistic content and entice enterprise employees to provide sensitive information. Unfortunately, more than 90% of security operations centers (SOCs) still rely on human-led processes, which means that 23% of incidents cannot be investigated because the overall workload is too large.

Artificial intelligence-driven network security can automatically perform threat detection and event response, which can help solve this problem. Palo Alto provides a large number of artificial intelligence tool combinations for cloud security, network security, and security operations, such as the Cortex XSIAM platform launched last year, which aims to achieve SOC automation and has achieved great results.

For example, XSIAM reduced the number of incidents that an oil and natural gas customer needed to investigate manually by 75%, and shortened the time it took for another service-oriented business customer to respond to incidents from three days to 16 minutes. In short, the platform effectively reduces missed security alerts and greatly reduces manual workload.

In the third quarter of the fiscal year 2024 ending on April 30, Palo Alto achieved revenue of $2 billion, a year-on-year increase of 15%, and the quarter-on-quarter and year-on-year growth rates slowed down, but it is expected that this is only temporary, mainly because the company is turning its business model toward "platformization."

The company found that the lifetime value of customers using all three of the company's platforms (cloud, network and operations) is 40 times higher than that of customers using only one platform. Therefore, the company targets customers who sign contracts with competitors, provides them with products for free until the contract expires, and integrates their network security stacks with Palo Alto. This will greatly increase the long-term value of this customer group.

By the end of fiscal year 2024, the company expects annual recurring revenue from such customers to reach $4.1 billion, a year-on-year increase of 39%. By fiscal year 2030, the company plans to double this number to $15 billion. Therefore, buying in now may be a great opportunity before this growth phase arrives.

2.$C3.ai (AI.US)$An accelerating enterprise-level artificial intelligence company

Enterprise-level artificial intelligence company C3.ai was founded in 2009, long before the AI frenzy. The company has developed more than 40 ready-made applications for enterprises in 19 different industries. Compared with independently developing artificial intelligence technology, this can allow customers to integrate artificial intelligence at lower costs and faster.

C3.ai's applications are particularly favored by non-technical companies in industries such as energy, financial services, and manufacturing. For example, banks use C3.ai's intelligent lending application to evaluate the creditworthiness of potential borrowers, and use C3.ai's anti-money laundering application to independently detect suspicious transactions and fraud.

Chemical manufacturing giant Dow Chemical is using C3.ai's reliability applications for predictive maintenance, reducing downtime of steam cracking equipment by 20%. Less downtime is equivalent to saving more money, thereby improving profitability.

In the fourth quarter of the 2024 fiscal year ending on April 30th, C3.ai cooperated with 487 customers, a year-on-year increase of up to 70%, highlighting the rapid growth of demand for artificial intelligence in the enterprise sector. The revenue in the fourth quarter reached a record 86.6 million U.S. dollars, a year-on-year increase of 20%, the fastest growing quarter in the past two years. This is also the fifth consecutive quarter of accelerated growth for the company. The management's forecast for the first quarter of the 2025 fiscal year (ending on July 31st) shows that revenue growth will be even faster, up to 23%. Two years ago, the company transitioned from subscription-based revenue to consumption-based revenue, which made it easier for customers to register and quickly expand their consumption scale. The company is now reaping the rewards of this transition. C3.ai's performance in the future may continue to improve.

As the company is still investing heavily in its growth plan, the non-GAAP adjusted loss reached $14 million in the fourth quarter, but it is worth noting that the balance sheet is very robust, with $750 million in cash and equivalents, which is enough to maintain the current situation for a long time in the future. If Wood Sister's judgment is correct, holding the stock may yield substantial returns for investors with a long-term investment horizon of at least five years.

Please note that in the fourth quarter, the company invested heavily in growth plans and had a non-GAAP adjusted loss of $14 million. However, its balance sheet is very strong with $750 million in cash and cash equivalents, which is sufficient to maintain its current position for a considerable period. If Wood Sister's assessment is correct, holding this stock may generate a substantial return for investors with a long-term investment horizon of at least five years.

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