Ark Investment Management operates eight exchange-traded funds (ETFs) that invest primarily in innovative technology stocks. Last year, Ark CEO Cathie Wood said software companies will 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's ETFs reflect that stance. Tesla stock is the largest holding in the flagship Ark Innovation ETF because Wood has called its self-driving software the biggest AI opportunity in the world. Plus, Wood recently acquired stakes in leading AI software companies like OpenAI, Anthropic, and Elon Musk's xAI through the Ark Venture Fund.
If Wood is right about AI software, several stocks could be set for substantial gains in the coming years. Here's why Amazon (AMZN 2.19%) and Duolingo (DUOL 2.33%) might be among them.
1. Amazon: AI software is just the start
Amazon is one of the most versatile AI stocks investors can buy. It's weaving the technology into many of its existing businesses, from e-commerce to streaming, and its Amazon Web Services (AWS) cloud division is developing everything from AI chips to AI chatbots.
Amazon uses AI to power the recommendation engine on Amazon.com. It learns what products customers like to buy so it can promote more of them to drive sales. Plus, the company developed a suite of AI software tools for sellers, which helps them craft product descriptions and create more engaging ads to increase conversions.
But Amazon Web Services (AWS) is the beating heart of Amazon's AI ambitions. It designed its own data center chips for training and inferencing AI models, and they have become popular with developers because they can reduce costs up to 50% compared to Amazon's other infrastructure (which is powered by Nvidia's more expensive chips, for example).
Then, there is Amazon Bedrock, where developers can access a suite of ready-made large language models (LLMs) in the cloud from leading start-ups like Anthropic. It also features a family of LLMs designed in-house by Amazon, called Titan. Developers can create AI applications for their businesses far more quickly by using ready-made LLMs compared to building their own, which would require substantial 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 suit the needs of almost any organization. It can scan, analyze, and even write computer code to accelerate product development, in addition to answering questions from employees on a wide range of topics.
Amazon could soon surpass a $2 trillion valuation, which is a milestone only four other U.S. technology companies have achieved. Here's the kicker: Wall Street expects Amazon to generate a record $638 billion in revenue during 2024, which is significantly more than each of those four other companies will bring in -- Apple is the closest to the mark with estimated revenue of $386 billion in its current fiscal year.
From that perspective, Amazon stock looks cheap at the moment. The company is quickly improving its profitability through cost reductions, efficiency initiatives, and AI, which could be the final key to unlocking a higher stock price over the long term.
2. Duolingo: Supercharging language education with AI
Duolingo isn't an enterprise software company, but its app-based language education platform is set to benefit from a new subscription-based revenue stream thanks to AI. Before we dive into that, let's examine its existing business.
As of the first quarter, Duolingo served 97.6 million monthly active users, up 35% from the year-ago period. It also had 7.4 million users who were paying a monthly subscription to accelerate their learning, and these paying users boasted an even faster growth rate of 54%. That is awfully impressive when you consider 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, which means the company collects more data than any other language education platform in the world. That's valuable when it comes to training AI models, which Duolingo has done since 2013 in an attempt to create a learning experience that rivals human tutors.
The launch of its Max subscription last year brought it a step 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 users can talk to in the language of their choice to improve their conversational skills. These new AI features run on a combination of Duolingo's own models and OpenAI's latest GPT-4 models.
The company is also using AI to craft lesson content, which gives employees more time to work on other important initiatives like new features instead.
Duolingo increased its revenue 45% year over year to $167.5 million last quarter. It also turned a profit with net income of $26.9 million, proving to investors it doesn't have to burn truckloads of cash to deliver 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 point than the company's other paid tiers, which could drive a continuation in its strong financial results going forward.
