Ark Investment Management manages eight exchange-traded funds (ETFs) that invest primarily in innovative technology stocks. Last year, Ark CEO Cathie Wood said software companies would be the next big opportunity in artificial intelligence (AI), predicting they could generate $8 in revenue for every $1 spent on chips from suppliers like Nvidia.
Ark ETFs reflect this position. You’re here stock is the flagship’s largest holding Arche Innovation ETF because Wood called its self-driving software the world’s biggest AI opportunity. Additionally, Wood recently acquired stakes in leading AI software companies such as OpenAI, Anthropic and Elon Musk’s xAI through the Ark Venture Fund.
If Wood is right about AI software, several stocks could see substantial gains in the years to come. here’s why Amazon (NASDAQ:AMZN) And Duolingo (NASDAQ:DUOL) could be among them.
1. Amazon: AI software is just the beginning
Amazon is one of the most versatile AI stocks that investors can buy. It integrates technology into many of its existing businesses, from e-commerce to streaming, and its cloud division Amazon Web Services (AWS) develops everything from AI chips to AI chatbots.
Amazon uses AI to power the recommendation engine on Amazon.com. It learns which products customers like to buy so it can promote more of them to drive sales. Additionally, the company has developed a suite of AI software tools for sellers, which help them write product descriptions and create more engaging ads to increase conversions.
But Amazon Web Services (AWS) is at the heart of Amazon’s AI ambitions. It has designed its own data center chips for training and inferencing AI models, and they have become popular with developers because they can reduce costs by up to 50% compared to other Amazon infrastructure (which are powered by Nvidia(chips are more expensive, for example).
Then there’s Amazon Bedrock, where developers can access a suite of ready-to-use large language models (LLMs) in the cloud from leading startups like Anthropic. It also offers a family of LLMs designed in-house by Amazon, called Titan. Developers can create AI applications for their business much faster using off-the-shelf LLMs than creating their own, which would require considerable amounts of time, data and money.
Finally, AWS offers finished AI applications like the new Amazon Q, a comprehensive virtual assistant that can be tailored to the needs of almost any organization. It can scan, analyze and even write computer code to accelerate product development, in addition to answering employee questions on a wide range of topics.
Amazon could soon surpass a $2 trillion valuation, a milestone only four other U.S. tech companies have reached. Here’s the bottom line: Wall Street expects Amazon to generate a record $638 billion in revenue in 2024, which is far more than any of these other four companies will bring in — Apple is closest to the mark with estimated revenues of $386 billion for the current fiscal year.
From that perspective, Amazon stock looks cheap at the moment. The company is rapidly improving its profitability through cost reductions, efficiency initiatives and AI, which could be the final key to unlocking long-term share price upside.
2. Duolingo: boosting language teaching with AI
Duolingo is not an enterprise software company, but its app-based language teaching platform stands to benefit from a new subscription revenue stream thanks to AI. Before we get into that, let’s take a look at its existing businesses.
As of Q1, Duolingo served 97.6 million monthly active users, up 35% from last year. It also had 7.4 million users who paid a monthly subscription to accelerate their learning, and these paying users showed an even faster growth rate of 54%. This is terribly impressive considering that up to 90% of the platform’s users are acquired organically (without paid advertising).
So where does AI fit into the picture? Duolingo users complete 10 billion exercises every week, meaning the company collects more data than any other language teaching platform in the world. This is valuable when it comes to training AI models, which Duolingo has been doing since 2013 in an effort to create a learning experience that rivals human tutors.
The launch of its Max subscription last year brought it closer to that goal. It introduced two new AI-powered features: Explain My Answer, which gives users personalized feedback based on their mistakes in each lesson, and Roleplay, a chatbot that users can speak to in the language of their choice to improve their conversational skills. These new AI features work on a combination of Duolingo’s own models and OpenAI’s latest GPT-4 models.
The company also uses AI to create course content, which gives employees more time to work on other important initiatives, like new features.
Duolingo grew its revenue 45% year over year to $167.5 million last quarter. The company also made $26.9 million in net income, proving to investors that it doesn’t need to spend a lot of money to generate strong revenue growth.
The new AI-powered Duolingo Max subscription is still in the early stages of its rollout, but it sells at a higher price than the company’s other paid tiers, which could help maintain its strong financial results in the future.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony DiPizio has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon, Apple, Duolingo, Nvidia and Tesla. The Mad Motley has a disclosure policy.
Cathie Wood Says Software Is the Next Big Opportunity in AI: 2 Great Stocks You Wish You’d Buy Today If She’s Right was originally published by The Motley Fool
