Traitov
UiPath's (NYSE:PATH) stock has had a difficult time since listing in 2021. This is mainly on the back of an extreme valuation, but in latest quarters UiPath's growth has slowed dramatically. The company has made large strides towards achieving profitability, but without growth the stock is likely to remain under pressure.
Market
The Robotic Process Automation (RPA) market is large and growing rapidly, due in large part to the fact that RPA software can free knowledge workers from low-value tasks. There are also a number of tailwinds supporting growth of the RPA market:
- Proliferation of software
- Fragmented technology landscape
- Tight labor markets
- Digital transformation initiatives
The traditional use case for RPA software has been automating low value individual tasks, but as capabilities improve, RPA software is increasingly being used for more complex tasks and to tie together entire processes. This means that RPA platforms cannot only focus on UI, but also have to offer APIs, as these are used to connect SaaS systems. RPA vendors also need to offer a suite of solutions which address all use cases and the entire RPA lifecycle.
Figure 1: The Automation Spectrum (source: UiPath)
Rather than just utilizing RPA software haphazardly to automate tasks, organizations are now taking a more strategic approach. Enterprises can achieve increased business value by combining multiple automation technologies and by adopting a holistic enterprise automation approach. This shift is part of the reason that UiPath has rapidly gained market share in latest years.
Figure 2: Benefits of a Holistic Intelligent Automation Approach (source: UiPath)
UiPath estimates that their current TAM is approximately 61 billion USD, with the potential to expand to 93 billion USD with the introduction of new features.
Figure 3: UiPath's Estimated TAM (source: UiPath)
While the RPA market has tremendous long-term potential, like most software markets there have been significant headwinds over the past 12 months. Job openings mentioning RPA in the job requirements declined significantly in the latter part of 2022. This may be in part due to a strong expansion through 2020 and 2021, but also reflects a pause in spending due to economic uncertainty.
Figure 4: Job Openings Mentioning RPA in the Job Requirements (source: Revealera.com)
UiPath
UiPath launched their first automation product in 2013, and really began to gain traction around 2017. Since then, the company has made significant investments to expand into adjacent automation areas around their core of UI. UiPath's platform is now focused on:
- Discovery - process mining, task mining and communication mining
- Automate - low-code/no-code development, workflow automation and the ability to create apps
- Operate - manage automations
- Test suite - connects automations to testing so that users can scale automations quickly when things change
Figure 5: UiPath's Platform (source: UiPath)
UiPath is updating their platform with release 22.10, which will deliver:
- The ability to build public-facing applications with UiPath Apps
- Enhanced capabilities in process and task mining
- Platform intelligence to help software robots understand both structured and unstructured data
- Enhanced capabilities for both Automation Suite and Automation Cloud
UiPath has historically found traction within finance departments as their software is suited to activities like managing accounts payable, accounts receivable, invoice matching, invoice splitting, connecting different systems, etc.
They are now trying to expand into new areas though, and in support of this are trying to sell higher into organizations, targeting C-level executives with automation as a strategic initiative. UiPath is also trying to land companies with a high propensity to invest in automation. Distributors will be used to serve the low end of the market, which should Excellerate the productivity of the salesforce.
UiPath recently changed their pricing model to try and reduce friction during the sales process. In the past, pricing was basically based on line items, meaning sales reps had to understand the pricing and it took a long time to get customer buy in. The new packaging and pricing aims to simplify the go-to-market motion and accelerate adoption of the broader platform.
Acquisitions
UiPath has acquired a number of companies over the past few years to support the capabilities of their platform and the introduction of new features. StepShot was acquired in 2019 for their process documentation software. This was supposed to enable customers to quickly and easily record, document and share processes as well as automate key steps in robot creation. UiPath also acquired ProcessGold in 2019 for their process mining software. This software helps customers to understand their processes and identify opportunities for automation.
More recently, UiPath acquired Cloud Elements, an interconnectivity platform to advance API-based automation capabilities. They also acquired the natural language processing company Re:infer, which was subsequently renamed communications mining. Re:infer uses machine learning to mine context from communications and transform them into actionable data. This type of technology can be used for applications like understanding and automatically responding to a customer email.
ChatGPT
UiPath has been working with GPT-3 for around 18 months and sees large language models as a significant opportunity. While ChatGPT has created a large amount of hype, the overall impact for a company like UiPath is somewhat unclear. ChatGPT can obviously be used to enhance employee productivity and will help with tasks like document understanding, which should be beneficial to UiPath. On the other hand, large language models are becoming increasingly adept at programming. Increasing the productivity of programmers with tools like CoPilot, or enabling knowledge workers to perform basic coding tasks could undermine the use of RPA tools at the edges.
The Platform Threat
While RPA is a large category that has the potential to support standalone platforms, it is also under threat from companies pursuing additional strategic considerations.
For example, Microsoft (MSFT), Salesforce (CRM) and SAP (SAP) all have an interest in RPA software, but to a large extent this is just in support of their core businesses. Microsoft in particular is in a strong position in this market due to their distribution footprint. In July 2022 their Power platform was a 2 billion USD business with over seven million monthly active users. Revenue was growing 72% YoY at the time. 97% of the Fortune 500 uses the Power Platform and 92% of the Fortune 500 uses Power Apps in at least one department. Microsoft's Power Platform is a family of business intelligence, app development, and app connectivity solutions. Power BI is a business intelligence solution. Power Apps, is an app for creating low-code custom business apps. Power Automate helps users create workflow apps and services. Power Virtual Agents is used to create interactive chatbots that can route customer requests.
Microsoft and Automation Anywhere are two of UiPath's largest competitors, although UiPath has stated that they do not see Automation Anywhere much in the market and that they are taking market share. UiPath has also been replacing Blue Prism, particularly within financial services. While Microsoft is performing strongly, UiPath believes that the moment customers want to scale, they look to UiPath in the enterprise space. Process mining, task mining and communication mining are also differentiators for UiPath.
Within RPA UiPath appears to have a strong competitive position, but it remains to be seen how they will be impacted by larger vendors with more diverse product portfolios.
Financial Analysis
UiPath's ARR was 1.11 billion USD in the most latest quarter, growing 38% YoY excluding foreign exchange headwinds. Revenue increased 29% YoY excluding foreign exchange headwinds. The healthcare and telecommunications verticals were areas of strength, as was UiPath's federal business.
For the fourth quarter of FY2023, UiPath expects ARR to be 1.174-1.176 billion USD. Revenue is expected to decrease by approximately 4% YoY in the quarter. It has been estimated that UiPath's cloud business will present roughly a 5% headwind to revenue growth.
Figure 6: UiPath Revenue Growth (source: Created by author using data from company reports)
UiPath's cloud business is still relatively small, but it is growing rapidly. While this type of growth is impressive, it is unclear how much of it is just from cannibalizing the on-prem business. UiPath's headline growth has shown no signs of acceleration, which would indicate that the cloud business is significantly additive. Once UiPath's existing customer base has adopted the cloud product, cloud revenue growth may stall.
Figure 7: UiPath Cloud ARR (source: UiPath)
UiPath has a fairly healthy mix of customers across end markets, which is a positive, but also somewhat perplexing in light of their growth slowdown. Given UiPath's relatively low exposure to customers in areas like technology, more robust growth could reasonably have been expected. This could suggest that UiPath's problems extend beyond just a weak demand environment.
Figure 8: UiPath ARR by Customer Sector (source: UiPath)
Job openings mentioning UiPath in the job requirements are down significantly over the past year. Search interest for "UiPath Pricing" has also been relatively weak over the past few years, which could indicate soft demand.
Figure 9: Job Openings Mentioning UiPath in the Job Requirements (source: Revealera.com)
Figure 10: "UiPath Pricing" Search Interest (source: Created by author using data from Google Trends)
UiPath switched focus to cost control in 2022 and has already demonstrated substantial improvements. Actions taken include restructuring, a hiring freeze and tighter control of discretionary spending. UiPath still has work to do though, as operating expenses were quite high for a company of their size.
Figure 11: UiPath Operating Profit Margins (source: Created by author using data from company reports)
Figure 12: UiPath Operating Expenses (source: Created by author using data from UiPath)
UiPath admits to overinvesting in headcount in the past, and as a result job openings have been low over the past six months. Job openings recently bounced back quite sharply though, which could indicate that the company was preparing for far worse conditions than have eventuated.
Figure 13: UiPath Job Openings (source: Revealera.com)
UiPath is targeting non-GAAP operating profit margins of greater than 20% in the long-run. This should be easily achievable given the company's high gross margins and low churn rate, assuming their competitive position can be maintained.
Table 1: UiPath Long-Term Target Margin Profile (source: Created by author using data from UiPath)
Figure 14: UiPath LTV / CAC Ratio (source: Created by author using data from UiPath)
Valuation
Over the past two years, UiPath has gone from being extremely overvalued to quite reasonably valued, depending on how you view the company's prospects. Based on a discounted cash flow analysis I estimate that UiPath is worth approximately 16 USD per share.
While rapidly improving profit margins should be supportive of the stock going forward, UiPath will need to demonstrate an ability to generate further growth, otherwise investors are likely to lose faith in the story. UiPath could have long run potential, but it feels too similar to the Slack situation to interest me.
Figure 15: UiPath EV/S Multiple (source: Seeking Alpha)
XH4D
Investment Thesis
Thanks to ChatGPT, AI technology is more popular than ever, but the number of clear investment opportunities is still small. Founded in Romania in 2005, UiPath (NYSE:PATH) develops AI software able to automate boring activities like extracting data, filling documents, or updating databases. But despite its products increasing the efficiency and profitability of other companies, UiPath’s business model is still not able to generate positive returns to investors other than growth in revenues.
Even assuming UiPath will achieve the efficiency and profitability levels of the best software companies, its stock appears to be extremely overvalued at today’s prices if compared to an estimated intrinsic value of $8.76 per share. Nonetheless, the growth opportunities represented by the market UiPath is leading in don’t permit us to completely discard the company.
In today’s analysis, we will assess why UiPath should be kept on our watchlist patiently waiting for buying the company at a great discount.
Business Model
UiPath operates in the robotic process automation (RPA) industry developing robotic software powered by AI technology that is able to emulate human behaviors, eliminating the need for employees to execute boring and repetitive tasks saving time and increasing overall efficiency. UiPath’s robotic software can be easily implemented by companies in their already existing ecosystem and results are immediately visible.
UiPath generates most of its revenues from the sale of licenses for the proprietary software, usually lasting one year, and from maintenance and support services that are offered under a subscription program to customers once they purchase the license to use the software. For a lesser part revenues are generated by non-recurring professional services like training services to get used to the products.
UiPath products are sold worldwide, accounting for more than 10 thousand customers. Their primary go-to-market strategy is relying on established consulting companies, like Accenture (ACN), Deloitte, and EY, which enter a partnership program under which they can promote UiPath’s solutions to their consumers as a tool to Excellerate their operations. The word-of-mouth effect of this strategy permits UiPath’s solutions to be known and adopted by the best companies in the world.
Operating Performance
Looking at UiPath’s operating performance, its revenues grew at a compound annual growth rate (CAGR) of 62.9% from 2020 to 2022 fiscal years, reaching $892 million. UiPath achieved excellent gross margins in the range of 80%, but due to the high operating expenses like R&D, needed to support future growth, its business model is still not able to generate positive operating returns with losses of $500 million in the last fiscal year. In regards to the nine months ended for the fiscal year 2023, revenues grew 24.4% y-o-y, and the gross margin remained at 82%.
UiPath presents a healthy financial position, with only $61 million in debt outstanding in the most latest quarter, represented by lease liabilities, and $1.38 billion in net cash available. However, UiPath went public not even two years ago, and the management keeps issuing shares to raise capital to fund operations at the expense of investors that see their investment diluted.
UiPath Shares Outstanding (TIKR Terminal)
Market Risks & Opportunities
UiPath’s strength resides in its technology. UiPath has to invest heavily in R&D to keep improving its robotic software and AI technologies adding new features and functionalities to further increase the benefits for its customers and maintain its leading position in the RPA industry.
The current leaders of the RPA industry are UiPath, Automation Anywhere, and Blue Prism and while the latter two offer a more advanced experience, UiPath opted to offer an easy-to-use experience at lower prices. The advantage of UiPath over its two main competitors is the easiness with which employees can start to implement its solution without any particular programming knowledge favoring its mass adoption. On the other hand, when customers need more advanced functionalities, they will rely on UiPath’s competitors. Hence, UiPath is losing a big chunk of revenues from those potential customers that, requiring advanced functionalities, would probably accept paying inflated prices just to get the best products available.
Despite the triad of companies competing for the leading position, the RPA market is still young and has room for growth for every player in my view, since it is expected to expand at a CAGR of 22% by 2033. The latest explosion in the popularity of AI solutions like ChatGPT should make explicit that there’s already high demand and interest in products able to automate cumbersome and time-consuming activities. Enterprise applications would be the first ones to be adopted, with companies looking for the best solution to increase efficiency and gain market shares over their competitors, and UiPath is currently sitting in a privileged spot to benefit from this future trend.
DCF Model
I use the discounted cash flow analysis method to value companies. The aim of a DCF analysis is to determine the present value of expected cash flows generated by the company in the future. The first step is to project the growth rate at which revenues will grow in the future. Secondly, we will need to assume the degree of efficiency and profitability at which the company will turn revenues into cash flows.
Efficiency is represented by the operating margin, and profitability by the return on invested capital (ROIC). Having the revenue projections and future operating margins, we obtain the EBIT and, after subtracting taxes, we get the net operating profit after taxes. The ROIC is used to determine the reinvestments needed to support future growth, determining how much profit the company generates from every dollar reinvested into the company. Future cash flows are calculated by subtracting the reinvestments from the net operating profit after taxes. The higher the growth rate, the higher the reinvestments needed to support it, hence the lower future cash flows will be.
The last step of a DCF analysis is to apply the discount rate to future cash flows, usually calculated using the weighted average cost of capital (WACC).
Projections
Now, trying to project UiPath’s performance, the story we are telling here sees UiPath galloping at the growing trend of enterprise adoption of AI solutions that will boost its revenues growth, permitting the company to reach efficiency and profitability on the same level of the best software companies before entering the maturity phase.
For the fiscal year 2023 we can expect revenues to grow 20%, badly affected by the economic downturn that cut business spending worldwide in 2022, while in the coming years, we can expect growth rates to recover momentum, with growth rates in the rage of 30%-40% as the adoption of AI technologies spread among companies, to then decline slowly as the company reaches maturity. With these assumptions we can expect UiPath’s revenues to quintuple in ten years, growing at a CAGR of 18.6% reaching $5 billion by 2032.
Given the strong assumptions about growth, UiPath will have to invest heavily to support it therefore we cannot expect UiPath to turn profitable in the coming years. Assuming the investments made will start to pay off in 3 years, as the adoption of AI solutions starts to consolidate, and assuming UiPath will still be the market leader, we can expect the efficiency and profitability to reach the level of the best software companies operating at the present. Among the software companies with a market capitalization above 10 billion, the average gross margin, operating margin and ROIC, are respectively 78%, 18% and 12%. Given that UiPath already has a gross margin higher than the current market average we can assume the company to have both an operating margin and ROIC slightly better than its peers by 2032, around 20% and 16% respectively.
Software Industry Average Operating Margin & ROIC (TIKR Terminal)
With these assumptions, UiPath is unlikely to deliver positive FCFF in the short term but by the time the company reaches maturity by 2032, we can expect FCFF to be in the range of $600 million.
UiPath Performance Projections (Personal Data)
Valuation
Applying a discount rate of 8.94%, calculated using the WACC, the present value of these cash flows is equal to an equity value of $4.8 billion or $8.76 per share.
UiPath Intrinsic Value (Personal Data)
Conclusion
Given my analysis and assumptions, UiPath stock seems to be extremely overvalued at today’s price. But even though at these prices UiPath does not represent a good investment opportunity, the growth potential that the RPA industry has in the coming years makes UiPath a noteworthy addition to the watchlist of every patient investor. If UiPath’s stock price declines below its estimated intrinsic value, or if there is any positive development that will make the company’s intrinsic value increase, UiPath would represent a good investment opportunity.
What happened
Shares of enterprise-software company UiPath (PATH -3.24%) jumped 20.8% in January, according to data provided by S&P Global Market Intelligence. Early in the month, the stock was down 10% before starting its upward run.
The good times have continued so far in February, with UiPath stock now up 38% year to date, as of 3:15 p.m. ET on Feb. 2. And this impressive performance has easily outpaced the 8% return of the S&P 500.
So what
According to filings with the Securities and Exchange Commission (SEC) on Jan. 4, multiple executives sold UiPath stock on Jan. 1, including co-CEO Robert Enslin, who sold over 55,000 shares. Note that all of the executives who sold still hold the majority of their respective stakes in UiPath, including Enslin, who now owns over 2.1 million shares.
Therefore, this isn't a case of a management team abandoning ship. But this selling pressure could explain why UiPath was down 10% to start the year.
On Jan. 11, UiPath presented at the 25th Annual Needham Growth Conference, as did many other companies. However, following the presentation, Needham analyst Scott Berg reiterated his bullish stance on the company, according to The Fly. Berg reportedly believes the competitive landscape favors UiPath right now, which is why he still gives it a price target of $20 per share, implying almost 14% more upside from where the stock trades as of this writing.
UiPath hopes to Excellerate its position in the competitive landscape by rolling out new features to its software, which is used by businesses to automate repetitive tasks. And on Jan. 17, the company announced tools that allow its customers to automate the testing of their own software products.
Perhaps by launching new tools, UiPath will continue to grow its spending per customer. This is measured with a metric called the dollar-based net-retention rate (DBNRR), where anything over 100% implies customers are increasing their spending from one year to the next. In the third quarter of its fiscal 2023, UiPath's DBNRR was 126%.
Continuing its streak over 100% or accelerating growth beyond 126% is a big part of the long-term investment thesis for UiPath.
Now what
UiPath's financial results for the fourth quarter of its fiscal 2023 aren't expected to be reported until March. However, management is guiding for a roughly 4% year-over-year drop in revenue, which makes the market's enthusiasm to start 2023 a bit of a head-scratcher.
That said, the timing of UiPath's revenue recognition can vary, which is why investors should balance slowing revenue growth by looking at ongoing gains in revenue under contract, reflected in the company's annualized recurring revenue.
In Q3, UiPath's recurring revenue jumped by $66.8 million in just one quarter. And going into Q4, management is expecting about the same-size jump. That's the metric to watch for shareholders, as it's a strong indicator of future growth.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends UiPath. The Motley Fool has a disclosure policy.
NEW YORK, February 15, 2023--(BUSINESS WIRE)--UiPath, Inc. (NYSE: PATH), a leading enterprise automation software company, today announced it will report financial results for its fiscal fourth quarter and full year 2023 ended January 31, 2023 after the market closes on Wednesday, March 15, 2023. Management will host a conference call and webcast to discuss the Company's financial results at 5:00 pm ET.
UiPath Fiscal Fourth Quarter and Full Year 2023 Financial Results Conference Call
When: Wednesday, March 15, 2023
Time: 5:00 pm ET
Conference ID: 13735660
Live Call: 1-877-407-8309 (US/Canada Toll-Free) or 1-201-689-8057 (Toll)
Replay: An audio webcast replay of the conference call will be available on the investor relations website for one year.
Webcast: https://ir.uipath.com
About UiPath
UiPath has a vision to deliver the Fully Automated Enterprise™, one where companies use automation to unlock their greatest potential. UiPath offers an end-to-end platform for automation, combining the leading Robotic Process Automation (RPA) solution with a full suite of capabilities that enable every organization to rapidly scale digital business operations.
View source version on businesswire.com: https://www.businesswire.com/news/home/20230215005624/en/
Contacts
Investor Relations Contact
Kelsey Turcotte
Investor.relations@uipath.com
UiPath
Media Contact
Toni Iafrate
PR@uipath.com
UiPath
UiPath (PATH) closed at $16.65 in the latest trading session, marking a -1.54% move from the prior day. This change lagged the S&P 500's daily loss of 0.61%. At the same time, the Dow lost 0.1%, and the tech-heavy Nasdaq lost 0.67%.
Heading into today, shares of the enterprise automation software developer had gained 44.53% over the past month, outpacing the Business Services sector's gain of 10.54% and the S&P 500's gain of 8.32% in that time.
Wall Street will be looking for positivity from UiPath as it approaches its next earnings report date. In that report, analysts expect UiPath to post earnings of $0.07 per share. This would mark year-over-year growth of 40%. Our most latest consensus estimate is calling for quarterly revenue of $278.14 million, down 3.99% from the year-ago period.
Any latest changes to analyst estimates for UiPath should also be noted by investors. latest revisions tend to reflect the latest near-term business trends. With this in mind, we can consider positive estimate revisions a sign of optimism about the company's business outlook.
Our research shows that these estimate changes are directly correlated with near-term stock prices. To benefit from this, we have developed the Zacks Rank, a proprietary model which takes these estimate changes into account and provides an actionable rating system.
The Zacks Rank system, which ranges from #1 (Strong Buy) to #5 (Strong Sell), has an impressive outside-audited track record of outperformance, with #1 stocks generating an average annual return of +25% since 1988. The Zacks Consensus EPS estimate remained stagnant within the past month. UiPath is holding a Zacks Rank of #3 (Hold) right now.
Investors should also note UiPath's current valuation metrics, including its Forward P/E ratio of 153.73. Its industry sports an average Forward P/E of 23.23, so we one might conclude that UiPath is trading at a premium comparatively.
Meanwhile, PATH's PEG ratio is currently 5.04. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. The Technology Services industry currently had an average PEG ratio of 2.29 as of yesterday's close.
The Technology Services industry is part of the Business Services sector. This group has a Zacks Industry Rank of 105, putting it in the top 42% of all 250+ industries.
The Zacks Industry Rank gauges the strength of our industry groups by measuring the average Zacks Rank of the individual stocks within the groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.
Make sure to utilize Zacks.com to follow all of these stock-moving metrics, and more, in the coming trading sessions.
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UiPath, Inc. (PATH) : Free Stock Analysis Report
