Cathie Wood is the founder and CEO of Ark Invest, an asset management company focused on disruptive technology stocks, especially those that use artificial intelligence (AI). For instance, Ark has made Tesla (TSLA -3.55%) and UiPath (PATH -0.42%) its two largest holdings. They account for 8.2% and 6.1% of its portfolio, respectively, signaling high conviction.

Here's what investors should know about these AI growth stocks.

Tesla: Ark's largest holding

Tesla led the auto industry in battery electric vehicle (BEV) sales with 24% market share in the first quarter, while runner-up BYD accounted for 15% of BEV sales. The company also reported the highest operating margin among volume automakers in 2022, an achievement CEO Elon Musk attributes to unparalleled manufacturing technology, and management believes the company can maintain its industry-leading margins in 2023 and beyond.

What's behind that confidence? One factor is Tesla's ability to produce battery packs (the most expensive part of an electric car) at a lower cost per kilowatt-hour than its peers. Additionally, the company recently unveiled a new vehicle assembly system that will be implemented at Gigafactory Mexico in late 2024. It promises to cut production costs in half while reducing its factory footprint by 40%. But management believes full self-driving (FSD) software will ultimately be the most important source of profitability.

FSD software can be sold at 100% gross profit, according to Musk, and it will power the robotaxi Tesla plans to mass-produce in 2024. Ultimately, FSD software will allow the company to launch an autonomous ride-hailing service, entering a market that Ark Invest says could generate $9 trillion in annual revenue by 2030. Of course, autonomous ride-hailing is still in its infancy, but Tesla has a great shot at becoming an industry leader in the future.

Musk says Tesla is "one of the world's leading AI companies" due to its expertise in AI software and hardware. Tesla has more autonomous driving data than any other automaker because it has more autopilot-enabled vehicles on the road. That data advantage hints at more advanced FSD software because data is the cornerstone of AI. Additionally, Musk says the in-car hardware that runs the FSD software is the "most efficient inference computer in the world."

Tesla shares currently trade at 8.6 time sales, a discount to the three-year average of 16 times sales. That creates a reasonable buying opportunity, but only for investors who believe the robotaxi narrative. If Tesla fails to evolve into a software and services company (i.e., FSD software and autonomous ride-hailing services), the stock is wildly overvalued at its current price.

UiPath: Ark's second-largest holding

UiPath specializes in enterprise automation. Its platform helps businesses discover automation opportunities and build software to automate various tasks and workflows, such as extracting document data, moving files, completing forms, and updating databases.

The UiPath platform leans on robotic process automation (RPA) to automate simple tasks, but it also incorporates AI to automate complex tasks. For instance, RPA software can pull data from a structured document (i.e., a document with form fields), but RPA software coupled with AI can pull data from an unstructured document, make sense of that data, then act on it. Industry experts have recognized UiPath as a market leader in several software verticals, including RPA, process mining, and intelligent document processing.

UiPath delivered mediocre financial results in the first quarter. Its dollar-based net retention rate dropped 16 percentage points to 122%, but that means the average customer still spent 22% more over the past year despite the uncertain economy. First-quarter revenue increased 18% to $290 million and the company reported $67 million in cash from operations, up from a loss of $53 million in the prior year.

Looking ahead, UiPath should be able to accelerate growth when economic conditions improve. Many businesses have cut back on spending for fear of a recession, but IT investments will rebound at some point, and implementing RPA and AI solutions will likely be a top priority when that happens. RPA and AI promise to improve productivity and reduce operating costs, and any upswing in demand should draw more businesses to the UiPath platform.

On that note, UiPath estimates its addressable market at $61 billion, meaning the company has hardly scratched the surface of its potential. Shares currently trade at 9.1 times sales, a discount to the two-year average of 17.2 times sales. At that price, investors should consider buying a small position in this growth stock.