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Computer Programmer

Chip stocks like Nvidia are soaking up most of the value created by artificial intelligence (AI) right now, but software stocks could present an even greater opportunity.

Ark Investment Management operates several private funds as well as multiple public exchange-traded funds (ETFs) that invest in innovative technology stocks. Last year, Ark CEO Cathie Wood said software companies will be the next big opportunity in the artificial intelligence (AI) industry, predicting the companies will generate $8 in revenue for every $1 spent on chips from suppliers like Nvidia.

Since Wood made that prediction, the Ark Venture Fund has piled into several private AI software companies like Anthropic, OpenAI, and Elon Musk’s xAI. Plus, Ark’s ETFs own several AI-related software stocks including Palantir Technologies, UiPath, and Tesla.

If Wood is right about AI software, there could be an exciting list of winners over the long term. Here’s why Amazon (AMZN 3.71%) and Meta Platforms (META 0.60%) might be two of the biggest.

1. Amazon: A tech giant with multiple AI layers

Amazon might be one of the most diverse AI companies in the world. It’s using the technology in its flagship e-commerce business, its advertising business, and, most importantly, its cloud computing segment led by Amazon Web Services (AWS).

AI powers the recommendation algorithm on Amazon.com, which learns what each customer likes so it can show them similar products to boost sales. Customers can also use a virtual shopping assistant called Rufus, which is trained on Amazon’s product catalog so it can answer questions and offer recommendations. Plus, Amazon just launched a new tool for its fulfillment centers called Project Private Investigator, which uses AI to identify faulty products before they are sent to customers.

But AWS is home to an even more exciting set of AI initiatives. Not only is Amazon designing its own data center chips to offer developers a more cost-effective alternative to Nvidia‘s hardware, but the tech giant also developed its own family of large language models (LLMs) called Titan. These LLMs are multimodal, which means developers can customize them to create their own generative AI software applications that are capable of generating text, images, and more.

Titan is accessible on the Bedrock platform in AWS, along with LLMs from several leading third-party AI start-ups like Anthropic.

Finally, AWS launched a virtual assistant called Amazon Q last year, which is capable of debugging and generating computer code to accelerate the pace of software development. Amazon CEO Andy Jassy says Q is the most capable AI tool of its kind because it has the highest known acceptance rate for code suggestions, and it catches more security vulnerabilities than any competing product.

AWS alone generated a record $26.2 billion in revenue during the recent second quarter of 2024 (ended June 30), which was a 19% increase from the year-ago period. It marked the third consecutive quarter of accelerating growth, thanks in large part to demand for AI. Amazon is one of the most attractively valued members of the trillion-dollar club, and if Cathie Wood is right, its stock could deliver spectacular returns for investors in the coming years.

2. Meta Platforms: A social media giant with an AI twist

Meta is the parent company of popular social media platforms like Facebook, Instagram, WhatsApp, and Messenger. Together, they serve more than 3.2 billion people every single day, and AI is playing an increasingly important role in the user experience.

Facebook and Instagram, for example, have evolved from social networks into entertainment platforms, with AI-powered algorithms showing each user the most relevant posts, even if they weren’t shared by someone they know. This is increasing the amount of time users spend on Meta’s family of apps, which means they view more ads and drive more revenue for the tech giant.

Meta continues to deliver new innovations for its advertisers, too. They can use AI to create engaging text and image content for their ads, which is great for businesses that don’t have an in-house marketing team. But the process will become even easier over time. Eventually, businesses will be able to tell Meta their advertising budget and their objective, and its AI engine will autonomously handle everything from crafting the ad to selecting the target audience.

Meta also developed its own open-source LLM called Llama. It just launched Llama 3.1, the most advanced version so far, with 405 billion parameters. The company says it’s already competitive with most other leading models, but CEO Mark Zuckerberg is already focusing on Llama 4, which he says will set the bar for the industry next year. Llama is at the foundation of many AI features in Meta’s pipeline, so it’s key to the company’s strategy.

Meta AI is one of those features. It’s a user-facing AI assistant, which is now accessible in the chat and search functions across all of the company’s apps. It can accurately answer questions on a broad range of topics, and it can be prompted to generate text and image content. It also lays the groundwork for Business AI, which could be a big revenue driver for Meta in the future. Zuckerberg believes every business will have its own AI agent capable of handling customer queries and even processing sales.

Meta stock is trading near an all-time high right now, but it’s still attractively valued relative to its big-tech peers. It trades at a price-to-earnings (P/E) ratio of just 26.7 as of this writing, which is about 17% cheaper than the 32 P/E ratio of the Nasdaq-100 technology index. Given the P/E discount, this could be a great entry point for long-term investors, especially if Cathie Wood proves to be right.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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 Amazon, Meta Platforms, Nvidia, Palantir Technologies, Tesla, and UiPath. The Motley Fool has a disclosure policy.