Cathie Wood is a big believer in the potential for artificial intelligence (AI) to completely disrupt the way businesses operate. That's why some of the biggest holdings in her Ark Invest funds are focused on AI and various enterprise applications for the technology.
Her and her team's favorite artificial intelligence stock of late is UiPath (PATH 0.26%). The stock shows up in all six of Ark Invest's active exchange-traded funds (ETFs). However, after a strong run in the stock price, the funds are cutting down their position in UiPath and redeploying the funds into another innovative stock.
The team believes AI could be a major growth driver for another top holding, and it's not afraid to put its money where its mouth is. That's why the Ark Invest team increased the weight of Zoom Video Communications (ZM 1.57%) in the Ark Innovation ETF, already its fifth-largest holding.
Image source: Getty Images.
UiPath is still a top pick for Ark
UiPath remains the third-largest position in the flagship Ark Innovation ETF and Ark's second-largest position across all of its funds. The company specializes in robotic process automation (RPA), which can automate repetitive tasks, such as data entry or setting up new clients, for enterprises.
There are a couple of ways UiPath takes advantage of AI. At its core, automation requires some sort of algorithm to implement. But more advanced RPA requires additional artificial intelligence. For example, relevant data may be trapped inside non-uniform contracts. UiPath can use its Document Understanding AI to pull out those relevant data and enter them into a standardized database with better accuracy than a human.
UiPath is also using AI to help enterprises find processes that could be good candidates for RPA through its Process Mining AI. Process Mining can source more business for UiPath while being a useful stand-alone product for enterprises to improve their efficiency with good old-fashioned human-powered work.
UiPath is a small company, and it faces meaningful competition from deep-pocketed competitors. Microsoft, for example, has moved to increase its use of AI in its enterprise software. That could be a threat to UiPath's AI products like Document Understanding, leading to more customers opting for the enterprise software giant (especially if they're already using Microsoft's Office suite).
UiPath's growing quickly as more and more businesses look to improve productivity. Annual recurring revenue (ARR) increased 24% year over year last quarter and management expects a 21% improvement in the fourth quarter. Operating margin is improving quickly, too, up 8 percentage points last quarter.
If UiPath can successfully fend off larger competitors with its AI advancements, growing its ARR at a healthy pace and expanding its profit margin, the stock could have a lot more room to run. With shares trading at an enterprise value-to-sales ratio of 10, it's not too expensive to establish a small position.
Buying Zoom before it Zooms higher
Ark Invest analysts think Zoom could be a major winner of increased AI productivity. It sees the stock climbing to $1,500 per share by 2026.
That's an astronomical price target, and it would be a big surprise if Zoom reached that price in the next three years. Still, there's a lot to like about Zoom.
The leader in video conferencing does a lot more than that. Its Zoom Phone (cloud-based telephone system) and Contact Center (a customer support hub) have shown promising traction since their launches. And Zoom is incorporating AI features across its services.
It's using generative AI to produce meeting summaries, answer questions for people who join a meeting late, and improve chat functionality. It's building new features to summarize chat threads, translate speech in real-time, and help teams organize ideas from meetings and notes. It also sees an opportunity to use generative AI to produce sales training simulations for new salespeople.
Zoom is just starting to recover from the pull forward of its business from the pandemic. Churn rates are still declining (3% last quarter), which is a sign that it should start reaccelerating revenue growth. As a software-as-a-service (SaaS) business, its annual recurring revenue should produce consistent and improving free cash flow.
The stock currently looks attractive, trading at just 14x its adjusted earnings per share. Moreover, its price-to-free cash flow ratio is 16.5, which is a reasonable price to pay for a company with the potential to grow free cash flow for years to come as it wins more and more customers and converts them into higher-priced tiers with AI features. Even without any multiple expansion, investors should expect strong upside to the current price. While it might not reach Ark's $1,500 price target, it might deserve a spot in your portfolio nonetheless.
