Cathie Wood's Ark exchange-traded funds (ETFs) hold positions in some of the world's most cutting-edge companies. However, there are some companies she has incredibly high conviction in, and in which her funds own significant stakes. Ark's largest holding is Tesla, the EV maker known for utilizing artificial intelligence (AI) in its autonomous driving software. But its fourth-largest holding is a much lesser-known AI-centric company: UiPath (PATH 2.18%).

Overall, Ark Invest ETFs own nearly 10% of UiPath stock worth more than $800 million. Should you follow Wood's lead into this AI investment?

UiPath is a practical application of AI

UiPath is in the business of taking repetitive tasks and automating them via robotic process automation (RPA). While some may be concerned that robots are taking people's jobs, it shouldn't be framed that way. Eliminating repetitive tasks that can easily be automated frees employees up to do more creative and innovative things that robots cannot -- tasks that can boost a company over the long term.

UiPath describes the collaborative nature of AI and RPA like this:

When conceptualizing RPA and AI, it can be helpful to think of AI as the brain, and RPA as the hands. It's when the two are combined that complex tasks can be completed.

By integrating AI into RPA, the scope of tasks that can be accomplished through automation is widened. UiPath's AI offering can also be deployed to discover what repetitive tasks employees are doing, so it can identify what processes need to be automated.

This use of AI is one of the most practical and easily understood in the market, which makes it both easier to sell to potential customers and for investors to understand its value.

But understanding the company is just one part of investing. How are UiPath's financials?

UiPath's finances are strong for a young company

UiPath is still a young and growing company. In its fiscal 2024 first quarter, which ended April 30, its revenue rose 18% year over year to $290 million, while its annual recurring revenue rocketed 28% higher to $1.25 billion.

As expected, UiPath lost $46.4 million from operations, indicating a 16% operating loss margin. Still, that's not a very deep hole to dig out of, so investors shouldn't be too concerned with its losses.

However, looking at a different profitability metric, free cash flow (FCF), it becomes clear that UiPath added a vast amount of cash to its balance sheet in the quarter. In fiscal Q1, it produced $65.5 million in FCF -- a solid 23% margin.While that's not true profitability because it does not factor in stock-based compensation (a non-cash expense), positive free cash flow allows the company to self-fund and push toward true profitability.

And while stock-based compensation is still a considerable expense for UiPath, it was down to $85 million in fiscal Q1 from $101 million in the prior-year period. This decline is excellent news for shareholders, and if the trend continues, it should help the company reach GAAP (generally accepted accounting principles) profitability in a few years.

UiPath's stock trades at attractive levels

Given UiPath's unprofitable state and that is hasn't produced positive FCF in every quarter over the past 12 months, the best valuation metric to use when accessing UiPath right now is the price-to-sales ratio. Trading at only 9 times sales, UiPath looks like a bargain compared to many high-flying AI stocks.

PATH PS Ratio Chart

PATH PS Ratio data by YCharts.

Furthermore, should UiPath maintain its 23% FCF margin and achieve its full-year guidance of $1.27 billion in revenue, it will generate $292 million in FCF this year. That prices the stock at 35 times future FCF, which might seem expensive. But, that's on par with many other profitable tech stocks like Microsoft (41 times FCF) and Adobe (33 times FCF).

Considering that UiPath is growing much faster, I'd say UiPath's stock is attractively priced at these levels.

While UiPath hasn't been FCF-positive every quarter over the past year, I think it's safe to assume it can achieve its margin. UiPath's operating margin has substantially improved over the past few quarters, rising from a high 40% loss in last year's Q1 and Q2 to around a 16% loss in the past two quarters. With UiPath burning less money on operations, that cash can trickle down toward to bottom of the cash flow statement resulting in increased cash each quarter.

With all three investing boxes checked, I'd say Wood is on to an outstanding stock here, and that investors should pick up UiPath stock whenever they can, as it's just waiting for investors to notice its potential.