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3 Cathie Wood Tech Stocks to Buy Hand Over Fist

Motley Fool - Fri Oct 27, 2023

Cathie Wood gained fame as an investor for her unwavering belief in companies at the forefront of technological innovation. Her ARK Invest focuses on finding disruptive technologies that can change the world, such as artificial intelligence (AI).

Her firm invests in a number of such innovators, but many aren't household names like Amazon. This can allow you to discover stocks with great upside potential earlier in their business growth.

To that end, here's a look at three stocks owned by ARK Invest that lack widespread name recognition, but are successful businesses. UiPath(NYSE: PATH) leverages AI to solve key challenges for businesses; Unity Software(NYSE: U)is a technology platform for digital creators; and PagerDuty(NYSE: PD) tackles the crucial task of monitoring information-technology (IT) systems.

UiPath finds ways to automate

UiPath is a compelling AI stock because its technology solves an overlooked business problem. Many companies use a number of digital tools and processes, but struggle to make the most of them by failing to maximize operational efficiency.

UiPath's AI analyzes an organization's digital tools, then finds ways to automate as many tasks as possible. For instance, it can streamline a bank's loan application process by scanning loan documents, extracting key information the bank needs, and even sending emails to applicants to ask for any missing information.

The company's customer count rose from less than 3,000 in 2019 to nearly 11,000 in 2023. Consequently, its sales expanded as well.

Through the first half of its 2024 fiscal year, ended July 31, UiPath's revenue reached $576.9 million, an 18% gain from the previous year's $487.3 million. The company expects sales to continue rising for the remainder of its 2024 fiscal year, guiding for at least $1.3 billion in revenue, up from $1.1 billion in fiscal 2023.

UiPath's other financial successes, such as improving free cash flow (FCF), point to its potential as a long-term investment. Combined with strong customer and sales growth, it's no surprise UiPath is among the top 10 holdings in Cathie Wood's funds.

Unity's digital creation engine

Another stock among Wood's top holdings is Unity Software. The company provides a platform to create digital 3D content for uses such as video games and movies. Its AI tools help customers speed up that creative process.

The company also helps customers market and sell their digital wares through its Grow Solutions segment, which generated $340 million in second-quarter revenue, a 157% year-over-year increase, making it a key contributor to the period's sales of $533 million.

This is just the latest quarter of steadily rising revenue since Unity went public in 2020.

U Revenue (Quarterly) Chart

Data by YCharts.

One key to the company's success is its pricing model. Developers can use some of its tools at no charge until they meet a sales threshold from their creations, at which point they begin paying.

However, Unity recently tried to change its pricing structure, leading to developer backlash, and the ouster of its CEO on Oct. 9. James Whitehurst, the former CEO of IBM's successful Red Hat cloud computing platform, took over as interim CEO, so the company is in good hands while it seeks a permanent replacement.

PagerDuty's monitoring system

PagerDuty focuses on IT infrastructure monitoring to minimize disruption of an organization's crucial systems. Its platform uses AI to identify when various issues are related to the same root cause, to avoid inundating its users with repetitive alerts.

One of the elements giving PagerDuty an economic moat against competitors is its integration with over 700 technology platforms, such as Amazon Web Services. This allows the company to provide comprehensive monitoring while making it easy to adopt PagerDuty's services.

As a result, the company's customer count in its fiscal second quarter, ended July 31, rose 19% year over year to 26,000. Second-quarter sales of $107.6 million were up 19% over the prior year.

PagerDuty anticipates revenue growth to reach at least $426 million in its 2024 fiscal year, a 15% year-over-year increase. More than 70% of its second-quarter revenue came from the U.S., leaving ample opportunities to increase sales internationally.

UiPath, Unity, and PagerDuty aren't household names, but each company's mastery of its respective tech specialty helps win customers and grow revenue. As a result, these three growth stocks have earned a spot in Cathie Wood's ARK Invest funds and can generate attractive returns for you as well.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Robert Izquierdo has positions in Amazon, International Business Machines, and Unity Software. The Motley Fool has positions in and recommends Amazon, PagerDuty, UiPath, and Unity Software. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.

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