Most investors understand that artificial intelligence (AI) stocks will play a vital role in the market over the next few years. However, many aren't in tune with which ones are slated to provide strong returns. By tracking funds focusing on this technology, investors can gain insight into a few possible winners.
Cathie Wood's Ark Invest is one of the most popular funds to track. Its portfolio is full of fantastic ideas, but my personal favorite is its second-largest holding: UiPath (PATH -0.86%). I've bought multiple shares of UiPath lately and will likely add more over time.
UiPath utilizes AI throughout its offerings
UiPath isn't directly devoted to AI. Instead, its product is robotic process automation (RPA) software. This allows its users to automate repetitive tasks, freeing employees to do more creative thinking.
UiPath also heavily utilizes AI in its offering. AI can be used to monitor employee tasks to pinpoint processes that can be automated, comb through communications to increase the scope of what can be automated, and process documents. An investment in UiPath is an investment in a practical AI use case, which makes it less susceptible to becoming part of an AI bubble.
NYSE: PATH
Key Data Points
RPA is a massive opportunity. Although Polaris Market Research estimated the total market opportunity was $2.66 billion in 2022, the company expects it to expand to $66 billion by 2032. In the third quarter of fiscal year 2024 (ended Oct. 31, 2023), UiPath's annual recurring revenue was $1.38 billion. That shows that UiPath is a clear market leader in this important industry.
It's also growing quickly, as its annual recurring revenue (ARR) rose 24% in Q3. This is critical, as UiPath still has a way to go before turning a profit. In Q3, UiPath posted an operating loss margin of 17%. However, this is an improvement over last year's 26% loss margin, which shows that it's steadily marching toward profitability.
Still, buying a stock at the wrong price can lead to horrible returns, even if the thesis is correct. So, is now the right time to buy UiPath stock?
UiPath's stock isn't cheap, but it's not as bad as some of its peers
Because UiPath isn't profitable, I will value the company using its sales. From this standpoint, UiPath's valuation has drastically risen in the past few months as more investors have noticed it. The company also reported a strong third quarter.
PATH PS Ratio data by YCharts
While you can't go back in time and buy it at 7.5 times sales, 11.8 times isn't terrible, considering that many software companies trade around 20 times sales for about the same growth.
This makes UiPath look like a strong buy and confirms that Wood and her team at Ark Invest know what they're doing with UiPath. Ark Invest has actually sold a few shares recently, but only because UiPath has become a concentrated position due to its recent success.
With Wall Street analysts projecting nearly 20% revenue growth in 2024, I can see myself purchasing more UiPath shares several times throughout the year.
