Ark Invest: These 2 A.I. stocks are being overlooked by the market

Published Sun, Jun 4 20238:21 PM EDT

Two firms specializing in artificial intelligence — UiPath and Twilio — are being underappreciated by investors, according to Frank Downing of Ark Investments. UiPath, a business process automation firm, is one of the companies that Downing views as overlooked. The firm develops software that automates manual workflows at large enterprises, which Downing suggests could be significantly boosted by large language models like those made by OpenAI, the firm behind ChatGPT. Downing, director of research for ARK Next Generation Internet ETF , said: "Large language models may unlock an additional 20% and perhaps even 40% of processes that UiPath can now automate, over and above the processes they're already automating." ARKW 1Y line He thinks this could mean fewer manual human interventions, substantially improving efficiency at UiPath for its customers. While previously UiPath's services were only sought after by the financial departments of major corporations, Downing added that UiPath's potential is now being eyed by marketing and compliance departments, too, opening up new markets for the company. UiPath is the eighth largest holding in the $1.3 billion fund, with a 5.69% allocation. The stock is up 41% this year. However, not everyone is convinced. Analysts at investment bank Mizuho believe the company's conservative guidance for this year's revenue and a slowdown in new customer growth due to the slowing economic environment do not give the stock much upside. "While we are encouraged by UiPath's profitability improvements, we expect the shares to remain range-bound over the near term until the company makes significant progress on its strategic repositioning to deliver growth," the Mizuho analysts led by Siti Panigrahi wrote in a note to clients on May 25. Mizuho's $16 price target points to a 10.8% downside for the stock. PATH 1Y line Twilio Twilio, a cloud communications platform founded in 2008, was also flagged by Downing as a potentially undervalued stock. Twilio acts as a communication medium between businesses and their customers and is often the backbone of call center and customer service software. Downing explained that Twilio's access to vast customer data would enable it to deploy large language models that make their messages "more personalized" and "impactful." A significant concern for investors has been the high cost of developing new AI models . Still, the director of research believes companies such as Twilio and UiPath are likely to capture the next wave of growth as AI is increasingly commoditized. "When GPT-3, the foundation model behind chatbots, was first trained in 2020, the cost was estimated at $4.6 million. Just two years later, the training cost has fallen to $400,000," Downing said. That represents an annualized cost reduction of 70%. While firms like Microsoft and Google are demonstrating wide-ranging AI products, Downing suspects that consumer willingness to pay for these may be limited due to open-source models' increasing commoditization. Instead, Downing suggests that differentiation and value will likely arise from niche use cases that can offer a high return on investment. Twilio accounts for is 4.34% of ARK Next Generation Internet ETF. According to FactSet's estimates, most analysts are conservative on Twilio's share price. The consensus price target points toward a 10% decline over the next 12 months, as the stock has already risen by 37% this year. TWLO 1Y line