Cathie Wood Says Software Is the Next Big AI Opportunity -- 2 Super Stocks You'll Wish You'd Bought Today if She's Right

Cathie Wood is the CEO of Ark Investment Management, which operates several private and exchange-traded funds focused on innovative technology stocks. Last year, Wood said software companies will be the next big opportunity in the artificial intelligence (AI) industry, predicting they will eventually generate $8 in revenue for every $1 spent on chips from leading suppliers like Nvidia .

Wood has piled money into several AI opportunities since making that call. The Ark Venture Fund recently bought stakes in private entities like ChatGPT creator OpenAI, Elon Musk's xAI, and Anthropic. Also, Ark's ETFs have been net buyers of several AI stocks this year, including Tesla , UiPath , and Palantir Technologies .

If Wood is right about AI software, there could be an exciting list of winners over the long term. Here's why Datadog (NASDAQ: DDOG) and Palo Alto Networks (NASDAQ: PANW) might be two of the biggest.

1. Datadog: A picks-and-shovels AI play

If you owned a retail store 20 years ago, you would rely on a sales attendant to determine customer satisfaction. In the world of online shopping, where customers are often faceless, determining their satisfaction is much harder. Datadog's cloud platform is designed to monitor digital infrastructure around the clock, instantly alerting managers to technical glitches so they can be patched before negatively impacting the customer experience.

Datadog has 28,000 clients across retail, entertainment, healthcare, financial services, and more. Simply put, any business with a digital presence -- whether customer-facing or not -- can benefit from Datadog's cloud-monitoring technology to find the root cause of technical issues immediately, which translates into less downtime.

Last year, Datadog decided to apply its expertise to the AI industry. Its new large language model (LLM) monitoring platform helps developers quickly diagnose problems, improve performance by tracking the quality of chatbot responses, and even manage costs by monitoring consumption. It could become an essential tool for any business developing AI in the same way that monitoring tools are used by many companies that rely on the cloud.

Datadog also offers a monitoring tool for developers using ready-made LLMs from OpenAI. Datadog's tools can track OpenAI usage across an entire organization, so managers can see which departments are responsible for the most consumption. That helps them control costs and computing workloads to maintain optimum performance.

Datadog expects to generate $2.6 billion in total revenue during 2024. As of the first quarter (ended March 31), around 3.5% of the company's revenue was coming from AI customers, which was up from 3% just three months earlier. That number could top 5% by the end of the year if the current rate of growth persists, meaning Datadog could bring in $130 million in revenue from AI alone.

That number might sound small, but keep in mind it was practically zero in Q1 2023. It's feasible to see AI becoming a substantial contributor to Datadog's financial results within the next five years as more companies adopt AI and require monitoring tools to protect their investment in the technology. As a result, Datadog stock is a great way to play the AI software boom Cathie Wood anticipates.

2. Palo Alto Networks: A leader in AI-powered cybersecurity

Cybersecurity is front-of-mind for many corporate executives at the moment, especially after last week's global IT outage caused by popular provider CrowdStrike . CrowdStrike is Palo Alto's largest competitor, so this might be an opportunity to win some contracts from dissatisfied customers.

Palo Alto operates three platforms: cloud security, network security, and security operations. The company is in the process of weaving AI into each one to help customers deal with modern-day threats. Palo Alto says 93% of organizations still rely on human-led processes in their security operations centers, and 23% of incidents are left uninvestigated because managers can't handle the sheer volume of incoming threats.

Palo Alto's Cortex XSIAM product introduces AI-powered automation into the security operations center. One customer -- Imagine Technologies -- now closes 100% of its security incidents using automation, up from less than 10% before adopting XSIAM. Boyne Resorts is experiencing similar success, reducing the time it takes to resolve incidents by a whopping 98%, from three days to just 1.7 hours.

In the past, businesses would piece together their cybersecurity stack from different providers, because there wasn't a true one-vendor solution. Palo Alto is trying to change that because customers who adopt all three of its platforms (representing a full solution) have a lifetime value 40 times greater than clients who use just one. To entice customers to shift all of their spending to Palo Alto, the company is offering fee-free periods to help them see out their existing contracts with other vendors.

That will impact Palo Alto's revenue growth in the short term, but it could lead to a significant payoff in the future. The company expects to generate $4 billion in revenue from "platformization" customers in fiscal 2024 (ending July 31), but it plans to more than triple that number to $15 billion per year by 2030.

Therefore, Palo Alto could be one of the best AI software stocks investors can buy if Cathie Wood's prediction proves to be right. It's one of only a few companies successfully monetizing AI already, and it has a clear plan to generate significant financial growth over the long term.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CrowdStrike, Datadog, Nvidia, Palantir Technologies, Palo Alto Networks, Tesla, and UiPath. The Motley Fool has a disclosure policy .