Cathie Wood Is Buying Up These 2 Game-Changing Generative AI Stocks
Cathie Wood, the renowned investor and her team at Ark Invest, have set their sights on the transformative potential of artificial intelligence (AI) in enterprise software. They believe that advancements in AI will drive a staggering $14 trillion industry by 2030, revolutionizing productivity across various sectors. With this in mind, Wood has recently added two major AI players to her Ark Next Generation Internet ETF (NYSEMKT: ARKW).
Wood’s actively managed ETF has included shares of Microsoft (NASDAQ: MSFT) and Meta Platforms (NASDAQ: META), marking their return to the portfolio after a few months. Currently, Microsoft accounts for approximately 1% of the fund’s portfolio, while Meta makes up about 1.1%.
The addition of these stocks is intriguing because Ark Invest usually rebalances positions based on performance. However, both Microsoft and Meta have performed in line with the Ark Next Generation Internet ETF since their previous inclusion in the portfolio.
So, what piqued Wood and her team’s interest in these Magnificent Seven companies and why should investors consider adding them to their portfolios?
Microsoft: Fast becoming an AI powerhouse, thanks to Satya Nadella’s transformative leadership.
Microsoft has swiftly transformed itself into an AI company over the past year. By increasing its stake in OpenAI, Microsoft has positioned itself as a leading cloud provider for AI developers. The company’s Azure revenue growth reflects this, outperforming its competitors, Amazon and Alphabet’s Google.
In the most recent quarter, Microsoft’s Azure revenue grew 29% year over year, fueled primarily by AI. In comparison, Amazon’s Amazon Web Services revenue grew only 12% year over year, while Google Cloud revenue improved by 22%.
Moreover, Microsoft is strategically positioned to capitalize on the projected $14 trillion opportunity in AI-powered enterprise software, as identified by Wood and her team. With its already massive enterprise software business, Microsoft’s Office Commercial products sales increased by 15% last quarter.
Microsoft is now focusing on expanding its Copilot service, which offers generative AI solutions across various industries. From assisting clinicians in patient note-taking to helping sales teams manage customer relationships, Microsoft aims to have its Copilot software adopted by knowledge workers across the board.
Additionally, Microsoft’s financial position is impressive, with $30.6 billion in cash generated from operations last quarter, and a cash reserve of $144 billion. This substantial liquidity provides ample opportunity for Microsoft to invest in advancing its AI capabilities.
Although Microsoft trades at 33x analysts’ 2024 earnings expectations, the company’s robust growth potential, AI prowess, and healthy financial position justify the premium valuation.
Meta Platforms: A long-standing investor in AI with innovative generative AI technologies.
Meta Platforms (formerly Facebook) has been investing heavily in AI for over a decade. Its machine learning algorithms have been instrumental in optimizing the feed rankings on Facebook and Instagram, shifting away from chronological timelines. Recently, Meta’s AI capabilities received a significant boost with the release of its open-source language model, Llama 2. This step has allowed independent engineers to build upon Meta’s AI advancements and enhance performance.
Llama 2 has proven exceptionally strong, even outperforming OpenAI’s GPT-4 in certain benchmarks. However, what truly sets it apart from the competition is its efficiency. Training the model and running applications using Llama 2 is significantly less expensive compared to other options. This cost-effectiveness can greatly benefit businesses looking to leverage AI on a large scale, potentially making them more inclined to use Meta’s efficient model. While Llama 2 is open source, businesses with extensive user bases must pay a licensing fee for commercial use.
Interestingly, Meta not only develops Llama but is also its own largest customer. At the recent Meta Connect conference, the company introduced a range of AI features, including chatbots with distinct personalities and celebrity likenesses. Meta is set to release a studio for businesses to develop their own generative AI-powered chatbots, boosting the usage of its business messaging features and click-to-message advertisements.
Meta also employs generative AI to assist marketers in creating impactful advertisements. Its technology can generate numerous variations of an ad by altering colors, images, and ad copy. These variations can be quickly tested across Facebook and Instagram to identify the most effective version. Such capabilities can significantly enhance ad performance, making Meta’s advertising platform more appealing to marketers compared to competing platforms.
Despite its strong stock price performance in 2023, Meta is one of the least expensive stocks among the Magnificent Seven, trading at less than 20x analysts’ consensus 2024 earnings. Considering its advanced AI technologies, it is surprising that Wood and her team at Ark Invest are not acquiring even more shares at this attractive price point.
In conclusion, Cathie Wood and her team at Ark Invest recognize the game-changing potential of AI and have added Microsoft and Meta Platforms to their portfolio. Microsoft’s focus on AI-powered enterprise software, its robust growth, and healthy financial position make it an appealing investment. Similarly, Meta’s extensive investment in AI and its innovative generative AI technologies position it as a company with tremendous growth prospects.
