Ark Investment Management operates a portfolio of exchange-traded funds (ETFs) focused on technology stocks. Its founder and chief investment officer, Cathie Wood, thinks software companies could be the next big opportunity in the artificial intelligence (AI) industry. In fact, he predicts that they will eventually generate $8 in revenue for every $1 spent on chips from such suppliers Nvidia.
Since making that prediction last year, Wood has invested in leading AI software startups like OpenAI, Anthropic, and xAI through the Ark Venture Fund. Also, Ark’s ETFs hold several publicly traded AI software stocks such as Meta Platforms, Teslaagain Microsoft.
If Wood turns out to be right about AI software companies, that’s why C3.ai (NYSE: AI) he can be one of the most successful.
Image source: Getty Images.
C3.ai was founded in 2009 to help businesses unlock the power of predictive analytics, better known today as AI. It was the first company of its kind, and now provides more than 40 AI applications and AI applications to organizations in 19 different industries, including oil and gas, financial services, and manufacturing.
It takes a lot of time, money, and expertise to build AI software from scratch, which is why many businesses turn to third parties — and C3.ai can deliver completed applications to customers within six months of the initial meeting.
Georgia-Pacific makes pulp and paper for consumer products, construction materials, packaging, and more. Each company’s machines have more than 5,000 sensors that generate a billion data points every day. Georgia-Pacific uses the C3.ai Reliability application to help with predictive maintenance, and so far, it has resulted in a 5% improvement in equipment efficiency. Also, C3.ai is so good at tracking technical problems that Georgia-Pacific employees now spend 80% of their time solving problems instead of searching for them.
That story is not unique. Oil producer A shell installed more than 100 customized C3.ai applications to monitor more than 10,000 equipment, reducing carbon emissions and the likelihood of catastrophic failure. Likewise, Dowone of the largest chemical manufacturers in the world, we reduced machine downtime by 20% thanks to the predictive power of C3.ai.
Demand for C3.ai software is growing. During the latest fiscal 2025 first quarter (ended July 31), the company closed 51 deals through its partner network, including AlphabetsGoogle Cloud, Amazon Web Services, and Microsoft Azure. That was a whopping 151% increase from the year-ago period.
C3.ai generated a record $87.2 million in revenue during Q1, which was up 21% from the year-ago period. That growth rate has accelerated for six consecutive quarters, and 21% marked the fastest pace in nearly two years.
The strong result comes from the change in strategy that C3.ai management implemented at the beginning of fiscal 2023 (which started on May 1, 2022). The company decided to switch from a subscription-based revenue model to a usage-based model, which eliminated long negotiation periods with potential customers, allowing them to sign up much faster.
The change led to an expected decline in C3.ai’s business in the early stages as it converted its existing customers to the new model, but it is now paying off with faster new customer acquisition and accelerated revenue growth.
C3.ai is still losing money in the end. Net loss came to $62.8 million during Q1, which was slightly better from $64.3 million in the year-ago period. However, on a non-GAAP (adjusted, non-GAAP) basis (which removes one-time and non-cash expenses such as stock-based compensation), the company’s loss was only $6.8 million.
C3.ai’s revenue is growing much faster than its operating expenses (21% versus 8.8% in Q1), and that trend is expected to continue, which could propel the company to profitability over the next few quarters.
C3.ai went public in December 2020, during a stock market frenzy fueled by low interest rates and a truckload of US government spending related to the pandemic. Its stock rose to $161 shortly after its initial public offering (IPO), and currently trades 84% ​​below that price.
Because C3.ai is not profitable, we cannot value its stock using the standard price-to-earnings (P/E) ratio. Instead, we can use the price-to-sales (P/S) ratio, which divides the company’s market capitalization by its trailing 12-month earnings.
Based on that figure, C3.ai stock trades at a P/S ratio of 9.6. That’s well below the peak of over 80 back in December 2020, which was an uncontrollable estimate.
However, 9.6 is also a slight discount to the three-year P/S ratio of 10.2 — excluding the 2020 period — suggesting the stock is currently cheap:
AI PS Rate Chart
C3.ai CEO Thomas Siebel believes that AI is a major market event, comparable to the dawn of the Internet and the smartphone. He says the AI ​​software market is worth $450 billion right now, with the potential to grow to $1.3 trillion by 2032. So, Cathie Wood is not alone when it comes to her bullish view on AI software.
Based on C3.ai’s current revenue, the company hasn’t scratched the surface of its opportunity. Considering its current stock price, now may be a good time to buy long-term.
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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, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of marketing and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platform, Microsoft, Nvidia, and Tesla. The Motley Fool recommends C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a policy of disclosure.
Cathie Wood Says Software Is The Next Big AI Opportunity — The 1 Super Stock You’ll Regret Not Buying If It Was Right was originally published by The Motley Fool
