"Wood Sister" Mysterious Investment in AI: Reducing Holdings in Unipath, Bullish on Zoom Against the Market

Cathie Wood, also known as "Wood Sister," firmly believes that artificial intelligence (AI) has the potential to completely disrupt the way businesses operate. That's why some of the largest investments in her Ark Invest fund are focused on AI and various enterprise applications. The Wood Sister team's current favorite AI stock is UiPath (PATH.US), which appears in all six active exchange-traded funds (ETFs) of Ark Invest. However, after a strong increase in stock price, these funds are reducing their positions in UiPath and reallocating funds to another innovative stock.

The team believes that AI could be a major growth driver for another top holding company, and this company is not afraid to invest in practical actions. That's why the Ark Invest team has increased the weight of Zoom (ZM.US) in the Ark Innovation ETF, making it the fifth-largest holding in the ETF.

UiPath remains Ark's top choice

UiPath is still the third-largest holding in the flagship Ark Innovation ETF and the second-largest holding in all Ark funds. The company specializes in robotic process automation (RPA), which automates repetitive tasks such as data entry or customer onboarding for businesses. UiPath has many ways of utilizing AI. At its core, automation requires some algorithm to make it happen. But more advanced RPA requires additional AI. For example, relevant data may be trapped in inconsistent contracts. UiPath can use its Document Understanding AI to extract the relevant data and input it into a standardized database with higher accuracy than humans. UiPath also uses its Process Mining AI to help businesses identify good candidate processes for RPA. Process mining can bring UiPath more business and is also a useful standalone product that helps companies improve efficiency through traditional manual work.

However, UiPath is a small company facing fierce competition from well-funded rivals. For example, Microsoft (MSFT.US) has started incorporating AI into its enterprise software. This could pose a threat to UiPath's AI products, such as Document Understanding, leading more customers to choose the enterprise software giant, especially if they are already using Microsoft's Office suite.

As more and more companies seek to improve productivity, UiPath is also growing rapidly. Last quarter, annual recurring revenue (ARR) increased by 24% YoY, and management expects a 21% growth in the fourth quarter. The operating profit margin is also rapidly improving, increasing by 8 percentage points last quarter. If UiPath can successfully withstand larger competitors with the progress of its artificial intelligence technology, grow its ARR at a healthy pace, and expand its profit margin, the stock may have greater upside potential. Establishing a small position would not be too expensive, as the enterprise value-to-sales ratio for stock trading is 10.

Buy before Zoom rises?

Ark Invest analysts believe that Zoom could be a major winner in the improvement of artificial intelligence productivity. The company predicts that by 2026, Zoom's stock price will climb to $1,500 per share. This is an astronomical price target, and if Zoom achieves this price within the next three years, it would be a huge surprise. Despite the fading of the "pandemic dividend," Zoom still seems to have many attractive aspects.

The leader in video conferencing does much more than just video conferencing. The company's Zoom Phone (cloud-based phone system) and Contact Center (customer support center) have shown strong appeal since their launch. Zoom is integrating artificial intelligence capabilities into its services. It uses generative AI to generate meeting summaries, answer questions for latecomers, and improve chat functionality. It is building new features to summarize chat threads, provide real-time voice translation, and help teams organize meetings and ideas in notes. It also sees an opportunity to use generative AI to simulate sales training for new salespeople.

Zoom is just beginning to recover from the fading boost from the pandemic on its business. The churn rate is still decreasing (3% last quarter), indicating that it should start accelerating revenue growth again. As a software-as-a-service (SaaS) company, its annual recurring revenue should generate continuous free cash flow.

The stock currently looks attractive, trading at only 14 times adjusted earnings per share. In addition, its price-to-free cash flow ratio is 16.5, which is a reasonable price for a company with growth potential in free cash flow over the next few years, as it wins more and more customers and converts them into high-value products with artificial intelligence capabilities. Even without any multiple expansion, investors should expect the current price to rise strongly. While it may not reach Ark's $1,500 price target, it still seems worthy of a place in an investment portfolio.