Cathie Wood Says Software Is the Next Big AI Opportunity – 1 Great Stock You’ll Regret Not Buying If She’s Right

Cathie Wood is president of Ark Investment Management, which operates a family of exchange-traded funds (ETFs) focused on innovative technology stocks. Last year, Wood said software companies could be the next big opportunity in the artificial intelligence (AI) industry. It predicts suppliers will eventually generate $8 in revenue for every $1 they spend on AI data center chips Nvidia.

And Wood put his money where his mouth was. Since making that call, it has invested in artificial intelligence software companies such as xAI, Anthropic, and OpenAI through its private Ark Venture Fund. Additionally, Ark’s ETFs hold a variety of AI software stocks, including: Tesla’s, palantir, Meta PlatformsAnd Microsoft.

If Wood is ultimately right about AI software companies, here’s Google’s parent company Alphabet (GOOG 0.52%) (GOOGL 0.77%) may be among the biggest winners.

Alphabet is transforming Google Search using artificial intelligence

Alphabet is a technology conglomerate that is home to Google, YouTube, self-driving car company Waymo, and many other businesses. Google Search accounted for more than half of Alphabet’s $84.7 billion in revenue in the second quarter of 2024, driven by its 90% market share in the internet search industry. But this dominance faces its biggest test yet because artificial intelligence.

AI chatbotsLike OpenAI’s ChatGPTIt provides quick access to information on almost any subject by providing direct answers to users’ questions. Google, on the other hand, requires users to review web pages to find the information they need and generates revenue by charging businesses to promote their websites in search results. As a result, the traditional search model is very important for Alphabet.

But instead of defending things that might eventually become obsolete, Alphabet decided to make radical changes. In most cases, users running Google Search queries will now receive AI-generated, text-based answers on top of web search results to allow them to access information faster. Google also took this concept a step further by launching AI Overview earlier this year.

Overviews include text, images, and links to third-party websites to provide more complete answers to prompts within Search. Additionally, the user can simplify or break down the answers with the click of a single button to better understand the content. Alphabet has already found that links within Overview get more clicks than the same links in the traditional search format; so this new feature could be a big driver of ad revenue in the future.

Moreover, Alphabet now offers its own family of AI models (and a chatbot of the same name) called Gemini, which can answer complex questions and produce content such as text and images. For an additional fee, Gemini is already available as an add-on to Google Workspace, which hosts productivity apps like Gmail, Docs, Sheets, and more. As a result, it can become a powerful driver of subscription-based revenue over time.

Google Cloud is Alphabet’s fastest-growing business

Search may be Alphabet’s biggest business, but Google Cloud is growing twice as fast. It generated record revenue of $10.3 billion in the second quarter of 2024, up 29% from a year earlier, compared to 13.7% growth for Search.

Google Cloudy It provides a portfolio of services to help businesses thrive in the digital age, including data storage, web hosting and software development tools, among others. But the platform has also become a leading provider of artificial intelligence services.

Developers can access the computing power they need to create AI software through Google Cloud’s data centers. They can even use the latest off-the-shelf software to speed up their progress. large language models (LLMs). This includes Gemini and more than 130 others from leading start-ups and third-party developers.

Google Cloud is also designing its own data center chips to give AI software developers more options; This helps differentiate the platform from other cloud providers that primarily rely on vendors such as: Nvidia. Google recently released its sixth-generation tensor processing unit (TPU), called Trillium, which delivers nearly five times the peak computing performance of the previous generation.

Most AI developers pay by the minute for computing capacity, so faster chips could significantly reduce costs. Plus, we’re coming back WoodIn his estimation, if Google produces its own chips at scale, using them to create software or renting them to other developers, its returns could be significantly greater because it would not have to send billions of dollars to suppliers. Nvidia.

Alphabet stock is cheap but there’s a big caveat

Alphabet generated $6.97 in revenue earnings per share Over the past four quarters and based on the stock price of $161.85 as of this writing, price-earnings (P/E) ratio 23.2. This makes Alphabet the cheapest of all valued US tech companies $1 trillion or more:

PE Ratio data Y Charts. PE Ratio = price-earnings ratio.

But there’s one glaring problem, and it has nothing to do with the company’s growth or the strong central position of AI.

The U.S. Department of Justice (DOJ) filed an antitrust lawsuit against Alphabet in 2020, alleging that the company engaged in monopolistic practices by making payments. Apple Some $20 billion a year to make Google the default search engine on its devices. Unfortunately for Alphabet, the judge in the case issued a ruling last month and sided with the Department of Justice.

It is not clear what the consequences will be. Alphabet may have to pay a financial penalty or the government force the dissolution of the entire company. The latter would create significant uncertainty for investors because Alphabet would likely have to sell certain parts of its business to convince the DOJ that it would not engage in anticompetitive conduct in the future.

Many Wall Street analysts say a breakup would be an extreme and unexpected outcome. Technology analyst Dan Ives of Wedbush Securities thinks Alphabet will reach an agreement with the Justice Department within the next 18 months to bring the matter to a conclusion. This could entail a financial penalty and some changes in Alphabet structures’ relationships with their partners.

Without a deal, it could take years to reach a final decision while Alphabet appeals the judge’s ruling, so the status quo should prevail for now. Therefore, Alphabet stock looks like great value at the current price, and if the company emerges from this regulatory situation unscathed, it could look like an absolute bargain considering. Cathie WoodAI software prediction.

Randi Zuckerberg, former market development director and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Anthony DiPizio It has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a feature disclosure policy.