The initial boom in AI investment has largely focused on infrastructure—semiconductors, data centres and cloud services—which have been the backbone for enabling AI advancements. Companies like Nvidia, Intel and large cloud providers saw massive investments as they built the hardware necessary to support AI applications. Rahul Bhushan writes
However, as we move forward, the spotlight is shifting towards AI software. The market for AI applications is expanding rapidly, driven by the growing need for more sophisticated, adaptable and integrated AI solutions across various sectors.
In 2023, enterprise investments in AI infrastructure were substantial, but there’s a noticeable and growing trend towards increasing investments in AI software applications.
The companies leading the charge
Companies such as Tesla, Palantir, Unity Software and Teradyne are at the forefront of this AI software transformation. Tesla is working on the largest AI project in world with their autonomous robo-taxi platform, which combines AI and robotics with energy storage.
Meanwhile, Palantir is leveraging AI to provide powerful data analytics solutions, enabling enterprises to make better more informed decisions. Unity Software is integrating AI to enhance real-time 3D content creation, revolutionising industries from gaming to automotive design, and Teradyne is using AI-driven robotics and automation solutions to optimise manufacturing.
Generative AI is already dominating the conversation around enterprise productivity, with companies like Notion and Writer expanding their offerings to meet customer demands.
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By GlobalDataIn public markets, Microsoft is enhancing productivity tools with its Copilot for Microsoft 365, Google is integrating AI across Workspace, Search and Cloud services, and OpenAI has partnered with firms like PwC and Bain & Company to boost their enterprise capabilities.
This shift indicates that AI software is not just a supplementary tool but will likely become a core component of business strategy and implementation. Beyond productivity, we are seeing signs of incredible use cases in areas from materials science and advanced robotics to personalised education and precision medicine. NVIDIA, for example, has partnered with healthcare giant Medtronic to develop an AI platform for medical devices.
Where the investment opportunity lies
The potential of AI software is highlighted by its ability to drive down operational costs, while enhancing productivity. This dual benefit makes it a very attractive area for investment.
Moreover, the flexibility and adaptability of new AI models, such as multimodal systems that can handle diverse inputs, are expanding the application landscape of AI software. These advancements are enabling more complex and valuable business solutions, further driving the demand and investment in AI software.
For every dollar invested in hardware, we expect 8-to-20 times the amount to be spent on software. This massive multiplier effect underscores the vast potential and necessity of investing in AI software as it becomes the backbone of enterprise operations and innovation.
While the initial wave of AI investment lays the foundational infrastructure, the next wave is clearly set to capitalise on the burgeoning AI software market. We believe investors should look beyond hardware to the transformative potential of AI-driven applications that promise to revolutionise industries and drive significant economic value.
Rahul Bhushan, is the managing director at ARK Invest Europe
