Cathie Wood Says Software Is the Next Big AI Opportunity: 1 Unstoppable $2 Trillion Stock You’ll Wish You Had Bought If She’s Right

Cathie Wood is the founder of Ark Investment Management, which manages several exchange-traded funds (ETFs) focused on innovative technology stocks. Wood thinks software companies will be the next big opportunity in the artificial intelligence (AI) industry, predicting they could generate $8 in revenue for every $1 they spend on chips from suppliers like Nvidia.

Since making that call last year, Wood has backed her words with action by investing heavily in leading AI startups like OpenAI, Anthropic and xAI through the Ark Venture Fund. Additionally, Ark’s ETFs include a number of popular AI stocks such as Tesla, AlphabetAnd UiPath.

If Wood turns out to be right about AI software companies, here’s why Amazon (NASDAQ: AMZN) could be among the biggest winners.

A leader in AI infrastructure and software

Amazon is one of five US companies worth $2 trillion or more, each vying for AI supremacy. But this company has one distinct advantage: it’s home to Amazon Web Services (AWS), the largest cloud computing platform in the world. It’s where companies can access hundreds of services to power their digital transition, but it’s also a go-to destination for a growing suite of AI services.

AWS wants to dominate all three layers of AI: data center infrastructure, large language models (LLMs), and software. Amazon operates data centers filled with graphics processors (GPUs) from vendors like Nvidia, but also designed its own chips called Trainium (for AI training) and Inferentia (for AI inference). Amazon says developers can save 50% on training costs by using Trainium1 compared to competing chips, and with Trainium2 now rolling out, those savings could increase even further.

Then there’s Amazon Bedrock, where developers have access to leading LLMs like Anthropic’s Claude 3.5, Metaplatforms‘ Llama 3.2 and Amazon’s own Titan family of models. Most developers will opt for a third-party LLM to build their AI software as it is cheaper than setting up an LLM from scratch, which requires significant financial resources.

On the software layer, Amazon has developed a virtual assistant called Q. This may answer questions about an organization’s internal data and policies, or may be asked to generate computer code to speed up software development. Amazon says Q has the highest code adoption rate in the industry, and on one specific internal project alone it has saved Amazon $260 million and a whopping 4,500 developer years.

During the recent third quarter of 2024 (ended September 30), AWS generated record revenue of $27.4 billion. It represented an increase of 19.1% from the year-ago period, marking the fastest growth rate yet in 2024, thanks in part to AI. Amazon says the AI ​​business within AWS is currently growing at a triple-digit rate compared to the year-ago period, and is growing three times faster than the cloud division at the same stage of its evolution.

AI is also transforming e-commerce and advertising

While most investors are focused on AWS, e-commerce is still Amazon’s largest segment, accounting for $61.4 billion of the company’s total revenue of $158.9 billion in the third quarter. Management is trying to improve efficiencies in the e-commerce segment to increase profit margins, and AI is a key part of that strategy.

For example, Amazon launched Project Private Investigator at its fulfillment centers earlier this year, which uses AI and computer vision to identify defective products before shipping them to customers to reduce returns. The company also continues to improve its virtual shopping assistant Rufus, which can answer customer questions and even help them compare products to generate more sales.

Sellers can leverage Amelia, a powerful virtual assistant that can answer operational questions, manage inventory and even forecast sales. Amelia can reduce costs by streamlining workflows and making salespeople more efficient, which could translate into savings for customers.

Amazon also has a booming advertising business. Amazon.com receives 3.4 billion visits per month, so it’s the perfect place for sellers to market their products, but the company also shows ads on platforms like Prime Video and Twitch. Businesses can access a range of AI tools to generate text, images and videos to instantly create compelling ads that can convert views into sales.

Ad revenue reached $14.3 billion in the third quarter, but that figure is likely to grow significantly in the future as ad rollouts on platforms like Prime Video are still in the early stages. Additionally, Amazon’s tools can help the company capture a larger share of ad spend over time, as AI can turn virtually any entrepreneur into a marketing expert.

Image source: Amazon.

Amazon stock could deliver significant upside potential over the long term

AWS’s accelerating growth, combined with a focus on efficiency in the e-commerce segment, has led to a sharp increase in Amazon’s bottom line. The company generated earnings per share of $4.67 over the last four quarters, up a whopping 143% from the previous four quarters.

Based on Amazon’s share price of $208.91 at the time of writing, it currently trades at a price-to-earnings (P/E) ratio of 44.7. That may look expensive at first glance, because it’s a premium for the Nasdaq-100 technology index, which trades at a price-to-earnings ratio of 33.1.

However, Wall Street’s consensus forecast for next year (according to Yahoo!) suggests that Amazon’s earnings per share could rise to $6.15. That puts the price/earnings ratio at 34, which is almost in line with the Nasdaq-100:

AMZN PE ratio data according to YCharts

However, I would argue that the stock deserves to trade at a premium to the Nasdaq-100. If it maintains its current price-to-earnings ratio of 44.7, that means it could earn a return of 31% next year. Furthermore, given the pace of earnings growth, I wouldn’t be surprised if Wall Street’s forecast for 2025 turns out to be far too low.

As I mentioned at the top, Cathie Wood believes that AI software companies can ultimately generate eight dollars in revenue for every dollar spent on chips. Well, Amazon’s capital expenditures – most of which will go to AI infrastructure and chips – are on track to reach $75 billion this year, so the long-term payoff could be huge if Wood is right.

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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. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Meta Platforms, Nvidia, Tesla, and UiPath. The Motley Fool has a disclosure policy.