UiPath: Violent Move Likely

Jun. 02, 2022 2:11 PM ETUiPath Inc. (PATH)ARKQ, ARKK, ARKF, ARKW, GIGE, ARKX, ARKG, LRNZ, ROBT, IPO, FCLD, OGIG, MVPS, WCLD11 Comments5 Likes


  • We started buying PATH down into the teens for a swing trade.
  • The company just issued a pretty stellar earnings report, and PATH is likely to move.
  • Valuation-wise, PATH is very expensive.
  • The future is bright for PATH, but it may take a few years before the market figures out how to value the potential.
  • This idea was discussed in more depth with members of my private investing community, BAD BEAT Investing. Learn More »

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Our members and many of our public followers have noticed that we rotated a lot into value names, energy, banks, infrastructure, agriculture, etc., over a lot of our trades and suggestions in recent months. We have been short/hedged much of tech since February and that has played out well. With much of the uncertainty in the macro landscape, stocks have sold off violently.

In recent sessions, we have seen some signs of short-term stabilization. We thought some of the market was way oversold. Though we bet against some of these innovation names in the short-term, many of these stocks have been murdered the last 6-8 months.

One name stood out to us, being somewhat speculative, but a name we wanted to buy in the teens on the way down. The name in question is UiPath Inc. (NYSE:PATH). It is a compelling price now, and looks to move higher from our buy call in the mid and high teens. We guided members to buy on the way down, with our largest leg at $15. The company just issued a decent earnings report, and while expensive like many other growth and innovation names, we think this stock can move back over $20.

A few months ago, management "kitchen-sinked" their guidance. They down-guided, and the stock got crushed further. In the teens, we felt and still feel PATH is a speculative bet that will pay off. For those unfamiliar, this is an automation software vendor that helps companies efficiently automate their repetitive business processes. More specifically, they are really aiming to accelerate human achievement by delivering "the fully automated enterprise." So, what that means is that UiPath incorporates UI automation, API management, and AI computer vision, to automate repetitive business processes and tasks.

More specifically, it works in robotic process automation, or RPA. This is a sub-SaaS category that is growing rapidly by the day as more businesses apply automation to improve productivity and beef up their efficiency. As we move quarter-to-quarter into the future, UiPath stands to benefit from increasing market adoption of RPA. This one is speculative, and the company is working in a challenging competitive environment. But UiPath has strong technology and cost structures that should help the company keep its position as the leading RPA provider. With the stock trading down this much, but the company continuing to grow, we bought. We still see upside after the most recent quarter.

The company operates in more than 100 countries and revenues have been ramping up. The company ended the first quarter with total annualized recurring revenue, or ARR, of $977.1 million, up 50% year-over-year, This was in part driven by net new ARR of $51.8 million in the quarter. We should point out that foreign exchange did create an approximately $5 million headwind in the quarter, and they wrote down $5.5 million in ARR as a result of Russian sanctions and business issues over there, stemming from the conflict.

The Russian impact does weigh some, but not overly heavily, on the dollar-based net retention rate. In the quarter, the net retention rate was 138%. Factoring out Russia, dollar-based net retention rate was 139%, dollar based gross retention rate was 98%.

As a whole, first quarter revenue grew 32% to $245.1 million, and this beat consensus estimates by a strong $20 million. That is a win. Adjusting for currency and Russia, revenue grew 39% year-over-year. We continue to see strong growth ahead for the company, especially with remaining performance obligations, or RPOs, increasing 46% to $675.6 million in the quarter. Making adjustments for Russian write-downs, RPO grew 56% year-over-year, while current RPO increased 45% to $424 million.

One reason we really like this innovation name is its margins. They are incredibly strong. Overall, total gross margin was 85%. And while the number fluctuates with quarter-to-quarter revenue seasonality and investments made in its infrastructure, this is a solid result. Over in its software operations, gross margin was 92%. Now, with these kinds of margins, the company could soon turn a profit, but management is continuing to invest in services and cloud hosting to really scale up cloud business. Therefore, you will see operating expenses are quite high and lead to losses for the company right now. Yes, this is the big complaint with names like this, that there are "no earnings." We get it. That said, first quarter operating expenses were $219.1 million. That is a steep increase of 49%.

As a result of the operating expenses and stock-based compensation, first quarter GAAP operating loss was $116 million. However, $101.5 million of this was stock-based compensation expense. The problem with this kind of expense is that it grows the share count, and dilutes investors. So even if revenues and margins grow on a per-share basis, we could still lose money or make much less of it, all things being equal. Making adjustments, operating loss was $10.9 million. One thing that is positive is cash flow. First quarter free cash flow was actually negative $53.8 million, but the company pays its bonuses in Q1. However, for the year, free cash flow will be flat to positive, so that is a plus as the company continues to grow.

We think it is also critical to note that the company is sitting on $1.8 billion in cash. It is further important to note that there is no debt. That means going forward, the company can continue to invest itself. If it can remain free cash flow positive, the stock could find some footing so long as the growth remains and there is further adoption of RPA globally. The automation market is large and growing, and the company is in a good position to have a large market share.

What about as we look ahead. Well, last quarter, the stock got rocked when the company lowered its outlook. The Street did not like that, as shares were crushed. However, management upped its outlook and that is bullish. For Q2, expect $230 million in revenue, solid year-over-year growth, with operating losses around $58 million. Operating income for the year is projected to be $10-$15 million, with ARR over $1.22 billion by year-end. Although, the company will continue to invest in itself, with the solid revenue and margins, profits may not be that far behind. Still, the stock is expensive.

The company does not make money on a per-share basis. So what is it worth. Is it worth the cash on hand only? Is it worth cash plus assets? Certainly, it's overvalued then, with a market cap of 9.8 billion? We know on a price to sales basis the stock is still expensive even after falling some 80%, at 8.5X. The valuation is stretched, even in the innovation space. That is a risk. But how should the market value a name like this?

Overall, anything operating in innovation has been revalued tremendously lower. Only the strong will survive. We think PATH can command a premium valuation if it continues to show premium growth.

Take Home

We think a good price to pay was in the mid-teens for such growth. The company still looks great, even if the stock is expensive. There needs to be a sentiment shift to really sustain a rally. But the thing is, will the market really drive all of these non-earnings positive innovation stocks to single-digits? Highly unlikely. While we are underweight the space, we think PATH is an innovation name you can buy. We think it heads much higher off this report.

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Disclosure: I/we have a beneficial long position in the shares of PATH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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