1 of Cathie Wood's Favorite AI Stocks Just Reported an Incredible Quarter. Time to Buy?

Cathie Wood and her Ark Investment funds are known for investing in cutting-edge technology companies. Across all of Ark’s exchange-traded funds, the second-largest holding is UiPath (PATH -2.26%). With its current holdings, Ark owns nearly 10% of the company, and the stock makes up about 6% of Ark’s total portfolio.

With such a massive investment in UiPath, Wood and her team clearly like what they see at the company. Should you follow their lead?

Process automation is improved with AI integration

UiPath’s primary products are focused on robotic process automation (RPA). Essentially, if there’s a repetitive task, UiPath’s products can record, learn, and automatically do that task for its users. At the end of the day, RPA makes employees more efficient because they aren’t clicking on the same five buttons to run a report or fill out an expense form, for example.

But where UiPath shines is with artificial intelligence (AI) integration. By deploying AI alongside UiPath’s RPA, it can make automation smarter, expanding its software’s use case. UiPath sums up this collaboration 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.”

With these two products combined, UiPath’s software suite becomes a natural stepping stone for businesses looking to deploy AI, which is likely why Ark sees massive opportunity in the stock. 

It is also posting fantastic quarterly results alongside this compelling narrative.

Despite great results, the stock still trades at a discount to its peers

In the second quarter of fiscal 2024 (ended July 31), UiPath’s annual recurring revenue (ARR) rose 25% year over year to $1.31 billion, and management expects more of the same in the third quarter as it estimates ARR will increase another 23% to about $1.36 billion.

There are some big spenders within its client base too as UiPath has 254 customers spending more than $1 million annually, up from 190 last year.

While UiPath isn’t profitable, it’s doing a fantastic job controlling its expenses. In Q2, operating expenses declined slightly year over year. Combined with its revenue growth, UiPath’s operating loss margin improved from 50% to 27% last quarter.

After reporting its Q2 results on Sept. 6, the stock popped 11%, showing wide approval from the market.

With the business moving in the right direction, there’s only one more box to check: valuation.

Trading at under 9 times sales, UiPath isn’t as expensive as some other high-growth software companies, but it still carries a premium over the broad market. Its post-earnings rally hasn’t propelled it into unseen territory, so investors shouldn’t be concerned about missing the boat already.

PATH PS Ratio Chart

Data by YCharts.

UiPath has a massive market opportunity, and it’s growing quickly while improving its margins. It’s clear Cathie Wood and her team see a compelling investment in that combination. UiPath can offer a great way to gain exposure to AI so long as you’re willing to hold onto it long term.

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