At a recent conference in Munich, Ark Innovation ETF (ARKK 2.45%) manager Cathie Wood was asked about her favorite artificial intelligence (AI) plays.
While ARK has owned AI star Nvidia (NVDA 1.07%) in the past, Wood actually sold out of Nvidia in the company's main fund in January before Nvidia took off 189% this year. Though ARK's smaller ARK Autonomous Tech. & Robotics ETF (ARKQ 0.79%) and other strategies still hold the stock, Wood had also greatly scaled back the Nvidia holding in those ETFs since the earlier part of the year.
At the conference, Wood somewhat dismissed Nvidia as an "obvious" play on AI, given the stock's run to date and its valuation over 100 times earnings. Instead, Wood put forward two other "less obvious" AI names. But which is the better buy, and are they really better plays than Nvidia at the moment?
NYSE: PATH
Key Data Points
UiPath and Twilio are hoping for a comeback
Instead of chasing Nvidia, Wood advocated two software stocks that have sold off heavily since the 2021 boom in software-as-a-service names: UiPath (PATH +2.08%) and Twilio (TWLO 0.22%). These two names are currently the fifth- and seventh-largest positions in the main ARKK fund.
As you can see, with the way these names have sold off, they could practically be value plays at the moment, with both stocks down over 80% from their all-time highs.
NVDA Percent Off All-Time High data by YCharts.
While neither has positive GAAP (generally accepted accounting principles) profits at the moment, you can see that each trades at a massive discount to Nvidia on an enterprise value-to-sales basis. You can also see that Twilio is especially cheap on that basis, at less than 2 times revenues.
NVDA EV to Revenues data by YCharts. EV = enterprise value.
But are these stocks really bargains? And are they really AI stocks?
UiPath and Twilio and AI
UiPath and Twilio both serve enterprises. UiPath's offerings are in robotic process automation (RPA) solutions, which help enterprises automate manual processes to greatly enhance productivity. Meanwhile, Twilio operates a communication platform-as-a-service whereby businesses can seamlessly communicate with customers through digital channels via text, email, and voice, along with data tools that glean information from those interactions to develop highly personalized marketing campaigns at scale.
So, both companies already engage in the business of gleaning insights from data, which is basically AI. But of the two, UiPath seems to be further along with AI than Twilio.
As part of its core offerings, UiPath has already developed machine learning tools, such as computer vision, which can understand work that occurs on desktops, along with strict governance tools required by enterprises. UiPath tools can also extract text from complex documents and determine meaning from customer and supplier interactions, ascertaining the work back-office workers do and then suggesting more automation steps to replace these tasks.
UiPath has, arguably, already been doing good AI work, albeit not generative AI. However, on the last conference call with analysts, management said generative AI should be a tailwind as it will enable even less technical people to run UiPath's automation suite.
In contrast, Twilio has long been a go-to platform for communications between an enterprise and its customers. This year, the company actually separated its business into two units: the communications platform that enables text, voice, and email marketing campaigns; and its data and applications suite, which is a set of tools that uses data and intelligence to help enterprises better personalize communications at scale to make them more effective.
However, thus far, Twilio has been more of an enablement platform than an intelligence platform. While Twilio now intends to become more of a data and intelligence platform, it's still a less clear AI play than UiPath. The lower-margin core communications enablement platform makes up the vast majority of its business, at roughly 90% of revenues, with data and applications making up just over 10%.
NYSE: TWLO
Key Data Points
More AI capabilities has led to better financials
The thesis that UiPath has more differentiated and AI-based products than Twilio is also borne out by each company's financials. Here, UiPath appears to be outdoing Twilio in just about every key metric for a software company.
|
Company |
Q2 Revenue Growth |
Q3 Revenue Growth Guidance |
Q2 Gross Margin (non-GAAP) |
Net Expansion Rate |
|---|---|---|---|---|
|
UiPath |
19% |
20% |
86% |
121% |
|
Twilio |
10% |
3.5% |
52% |
103% |
Data source: Twilio and UiPath Q2 2023 press releases. GAAP = generally accepted accounting principles.
Not only is UiPath outgrowing Twilio by a wide margin, but its revenue also seems set to accelerate, while Twilio's is decelerating. And decelerating revenue is really not good when you have fairly middling gross margins, as Twilio does. As you can also see, UiPath has been able to get existing customers to buy more and more of its software over time, as evidenced by the healthy net expansion rate, which measures how much the existing customers bought relative to last year.
The better margin and growth metrics point to UiPath being a more differentiated or "sticky" product for large enterprises than Twilio is. So, while UiPath is the more expensive stock on several valuation metrics, it seems to deserve that healthy premium over Twilio.
UiPath is the pick
Both companies are in fortunate positions with lots of net cash on their balance sheets. And each is repurchasing stock after the software swoon over the past 18 months. However, Twilio's huge deceleration and, importantly, lower-margin business make me dubious that it can execute the big turnaround shareholders are looking for, while UiPath appears to be gaining momentum. And its more differentiated AI-centered business makes it the better of Cathie Wood's AI bets.
