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Cathie Wood's 3 Top Artificial Intelligence Stocks

Motley Fool - Thu Nov 30, 2023

As the founder and CEO of Ark Investment Management, Cathie Wood has found great success focusing on what she describes as "technologically enabled disruption." She often argues that artificial intelligence (AI) will be the most disruptive technology yet, even going so far as to suggest that buying the Ark Innovation ETF is "a bet on the future of AI."

But which individualAI stocks are the most promising within Cathie Wood's portfolios? I think the three stocks below stand out from the rest.

A company using technology to accelerate human development

Ark's various exchange-traded funds (ETFs) hold 47.3 million shares of UiPath(NYSE: PATH) worth an incredible $865 million -- making it the firm's fourth-largest position overall, at around 6% of its total holdings. It's obvious that Wood believes in the growth story of the specialist in robotic process automation (RPA).

With shares up 60% year to date and more than 20% since I singled it out as one of the market's most underappreciated AI stocks in August, suffice to say I believe in UiPath as well.

But what makes it so special? Whether through full automation or with some level of human supervision, UiPath's RPA technology helps people build, deploy, and manage software robots capable of emulating a virtually countless number of human actions -- think everything from software testing to vetting resumes, processing loan applications, or detecting fraud. And this isn't technology designed to replace human workers; instead, according to UiPath, it aims to "accelerate human development" by allowing people to be more productive.

Business automation is a total addressable market Gartner estimates to be worth around $93 billion annually; this gives UiPath a long runway for growth.

The company is set to release fiscal third-quarter earnings after the market closes on Thursday (Nov. 30), and its latest guidance calls for full fiscal-year revenue growth of roughly 20.5%. It remains to be seen which direction UiPath stock goes in response to its earnings report, but I'll strongly consider adding to my own position on any pullbacks.

A (temporarily) slow-growing AI play

Meanwhile, with 7.13 million shares worth $464 million as of this writing -- or 3.2% of Ark's total holdings -- Cathie Wood is also betting big on Twilio(NYSE: TWLO). Shares of the customer-engagement platform are up more than 30% year to date, and stand out as one of only a few stocks that Wood and her team actually bought earlier this month -- even as they simultaneously pared back Ark's stakes in several other AI stocks including NVIDIA, Tesla, and Alphabet.

Twilio recently launched an integration with Open AI's large language models, dubbed "CustomerAI," which uses generative AI to help enterprise customers build deeply personalized customer-aware interactions via its platform.

But Twilio is curiously one of the market's slower-growing AI stocks, with the third quarter of 2023 up a modest 5% year over year to $1.03 billion. Its seemingly lackluster results have also recently attracted the attention of activist investor firm Anson Funds; Anson recently amassed its own $50 million stake in the company, to push Twilio to unlock value for investors by either putting itself up for sale or divesting some noncore assets.

Even so, during last quarter's conference call Twilio's co-founder and CEO Jeff Lawson framed its slow top-line gains as purposeful, a consequence of the company's actions in "building a foundation for profitable growth" over the long term. Lawson also noted that during the quarter Twilio delivered record adjusted operating income of $136 million and free cash flow of $195 million, with the latter metric turning positive two quarters ago after years of roughly break-even results.

I certainly don't mind Twilio's approach if it means generating significant operating leverage, especially in today's market, when interest rates are high and capital is increasingly difficult to raise for yet-to-be-profitable tech stocks. Once Twilio has built that foundation and opts to reaccelerate its top-line growth, I think many investors will look back and regret not buying at current levels.

A fast-growing, profitable AI stock

Finally, with 9.42 million shares worth $186 million, Palantir Technologies(NYSE: PLTR) represents the smallest slice of these three stocks at 1.2% of Ark's holdings. Palantir's Artificial Intelligence Platform (AIP) software helps organizations create and govern AI systems across their technology stacks, to handle everything from financial compliance to insurance analytics, cybersecurity, legal intelligence, and even advanced warfare.

Indeed, as generative AI came into the mainstream and Palantir launched the AIP platform earlier this year, CEO Alex Karp said Palantir's "software and company were built for this moment." Back in August, veteran Wall Street analyst Dan Ives at Wedbush even called it the "Messi of AI" and added that Palantir "has built an AI fortress that is unmatched."

Shares of Palantir have more than tripled so far in 2023, capped by its fourth straight quarter of achieving outsized revenue growth (up 17% to $558 million in Q3) and GAAP profitability (with Q3 net income of $72 million) earlier this month.

Palantir's growth is broad-based as well, with commercial and government revenue up 23% and 34%, respectively, last quarter. It's also comfortably cash-flow-positive, generating cash from operations of $133 million and adjusted free cash flow of $141 million last quarter (25% of revenue).

The company has not only achieved sustained profitability and cash flows in these early stages, but also appears to be enjoying accelerated adoption with virtually no ceiling for its potential growth. I think Palantir is arguably the most exciting AI stock on the market today.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Steve Symington has positions in Nvidia and UiPath. The Motley Fool has positions in and recommends Alphabet, Nvidia, Palantir Technologies, Tesla, Twilio, and UiPath. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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