Catherine Wood (Trades, Portfolio) is the founder and chief investment officer of Ark Invest, an investment firm that has a range of active exchange-traded funds focused on disruptive innovation.
An early proponent of artificial intelligence, Wood is famous for investing in Nvidia Corp. (NVDA, Financial) at just $4 per share back in 2014, which is now close to $400 per share at the time of writing. Due to this major bull run, the guru has reduced her position in Nvidia by over 20%, taking profits off the table. In a May interview with Bloomberg, Wood revealed her investments in AI stocks which she believes are overlooked and “most people haven’t discovered yet” with reference to AI.
In this disucssion, I will break down two of these stocks.
UiPath
The first stock is UiPath Inc. (PATH, Financial), a Romanian-founded company that specializes in robotic process automation.
Wood, who has called this company a “beautiful AI Play,” added 837,124 shares during the first quarter, bringing Ark’s total number of shares held to 44.80 million. This makes Ark Invest the largest shareholder with ownership of 8% of shares outstanding.
Headquartered in New York, UiPath has its roots as a provider of “software robots,” which help businesses automate manual tasks, saving time and boosting efficiency. Given the key value proposition offered by AI is the ability to boost productivity, UiPath is in a solid position.
The company has already rolled out a plethora of new AI-focused features, including an Open AI connector, which enables integration with tools such as ChatGPT, in addition to integration with Amazon’s Sagemaker, enabling organizations to build, monitor and deploy machine learning models.
Its other products include Clipboard AI, which is an enhanced copy and paste tool for automated form filling, and a communications mining tool that can read emails.
Super financials
UiPath reported super financial results for its first quarter of fiscal 2024 on May 24. It generated revenue of $290 million, which increased by over 18% year over year and beat analyst expectations by over $18 million despite foreign exchange headwinds.
This was driven by strong growth in its customer base, which rose to 10,850 businesses across various industries.
Its number of high-ticket customers also continued to grow, with those spending over $1 million in annual recurring revenue rising by 43% year over year to 240.
A key business use case has been leveraging its AI to read documents in order to speed up the loan origination and leasing process. A key customer in this space was automaker Hyundai (XKRX:005380, Financial).
In terms of profitability, UiPath reported an earnings loss of 6 cents, which beat analyst forecasts by 7 cents. On a non-GAAP basis, the business reported earnings of 11 cents per share, which beat projections by 9 cents.
Its balance sheet is also a fortress with $1.78 billion in cash and short-term investments and only $57 million in total debt, which is well covered.
Valuation
UiPath trades with a price-sales ratio of 7, which is significantly cheaper than other AI stocks such as C3.ai Inc. (AI, Financial) and Palantir Technologies Inc. (PLTR, Financial) which trade at multiples of 15 and 14.
Guru interest
During the quarter, the stock traded at an average price of $15 per share, which is slightly lower than the $16.50 share price at the time of writing.
Other guru investors, such as Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio), also loaded up on the stock in the first quarter at a similar level.
Tesla
Tesla Inc. (TSLA, Financial) is a company Wood has been bullish on for many years and is the stock that helped her fund skyrocket to fame in 2020.
However, according to the guru, not everybody is aware that Tesla is arguably the “biggest AI story out there.”
A key part of Ark’s strategy is to identify companies with proprietary and unique data that can be leveraged by AI models, which are likely to become commoditized. In this case, Wood said Tesla has “more data on real-world [self] driving miles” than all the other “auto and techology companies combined, like Waymo” outside of China.
As such, she increased her Tesla stake by 17.6%, or 814,635 shares, during the first quarter.
The investor believes the autonomous robo taxi industry is a “winner take most opportunity.” She went onto say she believes that opportunity will go from “zero today to $8 to $10 trillion in revenue by 2030,” which is astronomical.
Tesla is also becoming “more and more efficient” with regard to its gigafactories, which should help drive down production costs and boost margins long term.
Mixed financials
Tesla reported mixed financial results for the first quarter of 2023. Its revenue of $23.33 billion missed analyst consensus estimates by $26 million, but still rose by 24% year over year.
Its growth rate has also slowed down, which looks to be driven by the macroeconomic environment and competition from companies such as BYD Co. Ltd. (SZSE:002594, Financial) in China and Ford Motor Co. (F, Financial) with its electric F-150.
A positive is Tesla’s delivery and production numbers were at record levels, reporting 422,875 and 440,808. This indicates sales demand is still steady and production issues have been resolved for now.
The electric vehicle manufacturer also reported earnings per share of 73 cents, which missed analyst forecasts by 1 cent. The miss looks to have been driven by a series of price cuts, approximately $5,000 in the U.S. for each of its models, which has reduced margins.
However, Elon Musk defended this strategy during the first-quarter earnings call as he is aiming for "higher volumes and a large fleet" of vehicles. In addition, the CEO said the price cuts are a normal part of an automotive manufacture process in order to suit demand. This also helps boost consumers' eligibility for the $7,500 tax credit on offer by the IRS.
I personally think this strategy makes sense and also makes Tesla vehicles more enticing relative to the fierce competition.
At the Tesla shareholder meeting on May 16, Musk also agreed to “try out advertising” after a suggestion from a YouTuber. This really does highlight his connection to the people and his ability to build a valuable community.
Improvements in its Optimus robot were also showcased at the shareholder meeting. Musk believes the demand for these robots could reach 10 billion units, as everyone would “want one” and "maybe two."
He has bold plans to make the robot affordable for the masses at just $20,000 each and go on sale by 2027.
I personally see the huge potential in the robotics offering, but look at it as a bonus more than anything at this stage.
Valuation
The GF Value Line suggests Tesla has a fair value of $423 per share. Therefore, the stock is significantly undervalued at the time of writing.
Further, its forward price-sales ratio of 7 is 30% cheaper than its five-year average.
Guru interest
Shares of Tesla traded at an average price of $174 each during the quarter. In a CNBC interview in April, Wood announced a bold $2,000 price target for Tesla by 2027.
Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies and Philippe Laffont (Trades, Portfolio) also added to their positions at a similar level.
Final thoughts
Both UiPath and Tesla are not obvious picks to play the forecasted growth in the AI industry. UiPath’s vast experience in automation for businesses should give the business an edge when rolling out its AI tools. In addition, Tesla’s full self-driving data continues to grow and as the company get’s closer to full robo taxi operations, which would be a game changer.
