UiPath May Be A Cautious Buy

Summary

• UiPath may benefit from a slowing economy.
• The company's fundamentals and potential remain strong.
• UiPath's valuation is attractive.

Noam Galai

Introduction

UiPath (NYSE:PATH) is an RPA or robotics process automation company; a company that aims to create software robots to make businesses more efficient and free employees from repetitive tasks for them to focus solely on decision making. In the past few decades, the robotics revolution in the hardware industry has changed our lives. Factories became more efficient opening the world of mass production. Similarly, with the software robots, UiPath believes the world will be disrupted once again. UiPath's fundamentals, despite its near-term hurdles, remain very strong.

The company's long-term vision is not always reflected in the stock price. Near-term factors including progress, growth, valuation, financials, and macroeconomic conditions often determine the near-term movement. As seen in the chart below, UiPath's stock price has fallen about 70% from its highs due to the forex headwinds, growth worries, valuation fears, and macroeconomic headwinds diverting investors' attention from the company's long-term vision to its short-term risks.

Data by YCharts

However, the company's stock, in my opinion, has neared its bottom today. Valuation for companies like UiPath is becoming attractive, financials are strong, fundamentals remain promising, and most importantly, macroeconomic headwinds may work in favor of UiPath. Thus, despite macroeconomic headwinds including forex risks, I think it is reasonable for investors to consider UiPath at these levels.

Positive Catalysts

Potential Macroeconomic Tailwinds

Potential macroeconomic tailwinds are forming for UiPath. Consumer-led recession risks are resulting in numerous companies cutting their workforce or halting hiring. For example, Ford (F), Invitae (NVTA), Meta (META), Rivian (RIVN), Tesla (TSLA), Netflix (NFLX), Coinbase (COIN), and more companies have either reduced their workforce or stopped hiring.

Companies such as these may shift their attention to automation, which can provide increased efficiency and savings. Looking at case studies provided by UiPath, the company reported that Uber (UBER) was able to save $10 million per year with a 350% ROI in the first year using UiPath's RPA technology. Automation, throughout history, has proven to be a solution for efficient and cheaper operations. I do not believe this will change in the near future. The world will lean more and more toward automation, and UiPath, the market leader, is one of the biggest beneficiaries. As such, worsening economic conditions and pressure to lay off workers may benefit UiPath as companies seek more efficient and cost-sensitive solutions.

Competitive Advantage

UiPath is currently the leader in the RPA market competing against Blue Prism, Microsoft (MSFT), Automation 360, and many other privately held firms. Compared to its competitors, UiPath is not only the biggest player with the widest product offerings, the company allows its customers to scale most efficiently in the shortest time. UiPath allows its customers to discover RPA opportunities, test the product, and scale RPA usage in a single platform without the significant coding skills required by the user. On the other hand, platforms like Blue Prism require a specific programmer for using its products. Further, monitoring and deployment of products, or the attended capabilities, are limited or nearly nonexistent in competitors while UiPath offers full attended capabilities. Therefore, UiPath's competitive advantage in the market remains strong despite rising competitive pressures.

Valuation

In my previous article, I gave UiPath a neutral rating despite its promising vision as I believed the company's valuation was too expensive. After about a 72% fall in the company's stock price, I now believe that UiPath's valuation is reasonable at its market capitalization of about $9 billion.

Before getting into the numbers, investors should realize that UiPath's market capitalization has already fallen significantly from its peak, and most of the negativity has been already priced in. High inflation, worsening forex headwinds, slowing economic growth, growth rate worries, and even the Russian invasion of Ukraine are all old news that has affected the company's stock in the past few months. As such, a significant portion of the negativity is already priced into the stock.

UiPath is in a peculiar situation. The company is operating at near break-even levels when looking at its non-GAAP data while operating at an immense loss when looking at its GAAP data due to the high stock-based compensation (SBC) expense. The SBC indeed degrades shareholder value, but UiPath is in a grow-or-die situation. Either the company grows to dominate the RPA market and rake in profits in the future, or the company loses its lead to bigger competitors like Microsoft by trying to balance its budget who are inching up on UiPath every day. As such, given the situation of the company and the software market with immense potential that UiPath is in, I think it is unfair to only look at the GAAP operating margin and say UiPath is too expensive because by operating near break-even non-GAAP levels, the company is not only maintaining its massive cash balance of $1.68 billion with no debt, it can actively invest in growth through either internal investment or acquisitions. Therefore, I believe UiPath's valuation is fair.

Guidance

A significant portion of UiPath's stock price decline took place after the company reported 2022Q4 earnings. The lackluster growth and guidance for the entire year due to many headwinds discussed throughout this article have disappointed investors. However, with a recent upgrade in the company's FY2023 guidance, future growth prospects remain strong.

UiPath is guiding full-year 2023 revenue from $1085 million to $1090 million with an ARR of about $1222.5 million and non-GAAP operating income between $10 to $15 million. In terms of revenue, UiPath is expecting about 22% year-over-year growth despite a 17.6% year-over-year expectation in the second quarter. Further, ARR is expected to outpace revenue growth with about 32% year-over-year growth signifying that future growth continues to be strong for UiPath. Finally, non-GAAP operating income is expected to be positive turning around a $10.8 million loss in the 2023Q1 quarter and an expected $57.5 million loss in the second quarter. Overall, I believe UiPath is moving in the right direction recovering from the shock of the Russian Invasion of Ukraine, which affected Russian, Ukrainian, and some European operations.

Foreign Exchange Risk

In the 2023Q1 earnings report, UiPath mentioned that over 50% of its business is conducted outside of the United States, which means that the company is vulnerable to foreign exchange volatility. The strong dollar due to the aggressive Federal Reserve has created massive headwinds as UiPath's international business has been affected. Unfortunately, Jerome Powell has claimed that the Federal Reserve will not hesitate in raising rates aggressively to tame inflation even if it comes with some levels of economic pain. Further, even with moderating inflation metrics in the past month, Jerome Powell has said that the Federal Reserve's target inflation is 2%. Therefore, the U.S. Dollar is expected to be strong relatively devaluing foreign currencies creating headwinds for UiPath.

Summary

It is true that UiPath was expensive before; however, today, the company is fairly attractive. RPA market and UiPath's potential remain strong as valuation is not concerning anymore. Overall, with strong growth potential, guidance, and favorable valuation, UiPath may be a high-risk high-reward buy for long-term investors despite macroeconomic risks such as the foreign exchange ratio risk.

Analyst’s 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.

Comments

[mzmecz]

Second quarter operating expenses of $215.7 million. GAAP operating loss of $120.2 million included $88.3 million of stock-based compensation expense. That's a lot of compensation expense.

[Murad Shawar]

4-5$ max

[jerseyvalueinvestor]

interesting thanks, going to start a small position here and add over time if we see further declines

[Fender5]

The Fools recommended this a buy at $56.

[Jake Goldi]

Thanks for the information. Great company. I am long and continue adding more of their stock

[Ry The Investor Guy]

@Jake Goldi Goldberg Same for me.