Should You Buy One of Cathie Wood's Top AI Stocks?

 Should You Buy One of Cathie Wood's Best AI Stocks?

Cathie Wood's Ark exchange-traded funds (ETFs) hold positions in some of the world's cutting-edge companies. However, there are companies in which she has incredibly high conviction and in which her funds own significant stakes. Ark's largest holding is Tesla, an electric car maker known for using artificial intelligence (AI) in its autonomous driving software. But its fourth-largest holding is a much lesser-known artificial intelligence company: UiPath (NYSE: PATH )Overall, the Ark Invest ETF owns nearly 10% of UiPath shares, worth more than $800 million. Should you follow Wood's lead on this AI investment?

UiPath is a practical AI application

UiPath is all about performing repetitive tasks and automating them using Robotic Process Automation (RPA). While some may worry about robots taking people's jobs, it shouldn't be framed that way. Eliminating repetitive tasks that can be easily automated gives employees the freedom to do more creative and innovative things that robots can't do—tasks that can support the company in the long run.

UiPath describes the collaborative nature of AI and RPA as follows:

When conceptualizing RPA and AI, it can be helpful to think of AI as the brain and RPA as the hands. When the two come together, complex tasks can be completed.Integrating artificial intelligence into RPA expands the range of tasks that can be performed through automation. UiPath's AI offering can also be deployed to find out what repetitive tasks employees do, so it can identify what processes need to be automated.

This use of AI is one of the most practical and easy to understand on the market, making it easy to sell to potential customers and allowing investors to understand its value.However, understanding a company is only one part of investing. How is UiPath doing financially?

UiPath's finances are strong for a young company

UiPath is still a young and growing company. In the first quarter of fiscal 2024, which ended April 30, its revenue rose 18% year over year to $290 million, while its annual recurring revenue rocketed 28% to $1.25 billion.As expected, UiPath lost $46.4 million from operations, indicating a 16% operating loss. Still, it's not a very deep hole to dig out of, so investors shouldn't be too concerned about its losses.

However, looking at another profitability metric, free cash flow (FCF), it's clear that UiPath added a huge amount of cash to its balance sheet in the quarter. In the first fiscal quarter, it produced $65.5 million in FCF – a solid 23% margin. While not true profitability because it doesn't account for stock-based compensation (a non-cash expense), positive free cash flow allows the company to -fund and push toward true profitability.

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

UiPath shares are trading at attractive levels

Given UiPath's unprofitable status and the fact that it hasn't generated positive FCF in every quarter over the last 12 months, the best valuation metric to use when approaching UiPath right now is the price-to-sales ratio. Trading at just nine times sales, UiPath looks like a bargain compared to many high-flying AI stocks.

Additionally, if UiPath maintains its 23% FCF margin and hits its full-year revenue guidance of $1.27 billion, it will generate $292 million in FCF this year. That values ​​the stock at 35 times forward FCF, which may seem expensive. But that's on par with many other profitable tech stocks, such as Microsoft (41 times FCF) and Adobe (33 times FCF).Given that UiPath is growing much faster, I'd say UiPath stock is attractive at these levels.

While UiPath hasn't been FCF positive every quarter for the past year, I think it's safe to assume it can hit its margin. UiPath's operating margin has improved substantially over the past few quarters, rising from a high 40% loss in the first and second quarters of last year to around a 16% loss in the last two quarters. As UiPath burns less cash for operations, that cash can trickle down to the bottom of the cash flow statement, resulting in increased cash each quarter.With all three investing boxes checked, I'd say Wood has an outstanding stock here and investors should pick up UiPath stock whenever they can because it's just waiting for investors to notice its potential.

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As the technology sector continues to evolve, artificial intelligence (AI) has emerged as one of the most promising areas for investors looking for growth opportunities. One notable figure in the investment world who has gained significant attention for her visionary strategies is Cathie Wood, founder of ARK Invest. Wood's ARK Innovation ETF has consistently outperformed the market, and its focus on AI stocks has attracted the interest of many investors. In this article, we'll take a closer look at Cathie Wood's best AI stocks, explore their potential and help you make an informed investment decision.

Understanding the rise of AI stocks

Before diving into Cathie Wood's top AI tips, it's essential to understand the meaning of AI technology. Artificial intelligence is revolutionizing every industry, from healthcare and finance to transportation and entertainment. As AI applications continue to grow, companies at the forefront of this technology are poised for exceptional growth, making them attractive investment opportunities.

Cathie Wood's visionary approach

Cathie Wood is known for her progressive investment philosophy that focuses on disruptive innovation. Its belief in the potential of AI technology has led it to include several AI stocks in its flagship ARK Innovation ETF. As an investor, it is crucial to recognize its long-term perspective, as the true potential of AI may take years to fully develop.

The best AI stocks in Cathie Wood's portfolio

NVIDIA is a world leader in graphics processing units (GPUs) and AI technologies. Its GPUs have become a cornerstone for AI applications due to their parallel processing capabilities, making them ideal for training deep learning models. With an extensive product portfolio and strategic acquisitions, NVIDIA continues to strengthen its position in the AI ​​industry.

While Tesla is best known for its electric vehicles, the company has also made significant advances in AI and autonomous driving technology. Under Cathie Wood, Tesla has become a key player in the development of self-driving cars, with its AI-driven approach giving it a competitive edge in the automotive market.

Square, the fintech giant, may not be directly associated with AI, but its Cash app uses AI algorithms to improve user experience and detect fraudulent transactions. As digital payments and artificial intelligence intersect, Square benefits from this synergy.

Roku, a leading streaming platform, uses artificial intelligence to optimize content recommendations and increase user engagement. With the rapid growth of streaming services, Roku's AI-driven platform is positioned for continued success.

Analysis of potential and risks

While Cathie Wood's AI stock picks show significant promise, it is essential to consider the potential rewards as well as the risks associated with investing in these companies. The AI ​​industry is highly competitive and subject to rapid technological advancements that could impact companies' market position.

Investors should also keep in mind that Wood's investment approach may not align with their risk tolerance or financial goals. Its focus on disruptive innovation means higher volatility in its portfolio, making it suitable for investors with a long-term horizon and higher risk appetite.

Diversification and your portfolio

Before you decide to invest in AI Cathie Wood stocks, it's important to evaluate how they fit into your overall investment portfolio. Diversification is key to managing risk, and a mix of asset classes and sectors can help offset the impact of market fluctuations.

Cathie Wood's Best AI Stocks offer compelling opportunities for investors who want exposure to disruptive innovation. Companies like NVIDIA, Tesla, Square and Roku are at the forefront of AI technology and have the potential for substantial long-term growth. However, investing in these stocks requires careful consideration of your risk tolerance, investment objectives and portfolio diversification strategy.

As with any investment decision, it is essential to do your research and seek professional financial advice. While Cathie Wood's visionary approach has earned her acclaim, remember that all investments carry inherent risks and past performance is no indication of future results. So should you buy one of the best AI stocks by Cathie Wood? Only you can make this decision based on your financial situation and appetite for risk.