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Is UiPath (PATH) a Winner in the Software Industry?

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Founded in 2005, UiPath, Inc. (PATH) engages in the process of building an end-to-end automation platform, branding them a leader in the rapidly growing Robotic Process Automation (RPA) market. The company offers a variety of RPA solutions such as UiPath Studio, UiPath Robots, and UiPath Orchestrator that aim to unload workers from repetitive tasks and increase enterprise efficiency through automation.

The company went public through the NYSE on April 21st this year by listing 23.9 million shares at $56. The stock closed its first trading session up 23% at $69 per share. However, UiPath’s share price has declined 19.5% since then to close Friday’s trading session at $55.54.

With this in mind, I am going to analyze the company from a qualitative and quantitative standpoint to determine if it presents a buying opportunity for the long term.

Recent Developments 

On July 27th, UiPath, Inc. announced that Dentsu International, a leading advertising agency company, plans to utilize UiPath Automation Cloud to integrate automation and artificial intelligence (AI) capabilities across its enterprise. This move will help Dentsu to ease internal processes and client-oriented services. Undoubtedly, it’s a positive development for UiPath as it continues to expand its customer base, thus gaining market share in this highly competitive space. This will also increase the company’s licensing revenue, helping to maintain its double-digit revenue growth numbers in the following quarters.

Recent Financial Results

After reporting Q2 earnings on September 7th, shares of PATH dropped more than 10%. Keeping that in mind, let’s dive deeper into the company’s recent 10-Q report and analyze key operating metrics.

In Q2, UiPath’s revenue increased about 40% year-over-year to $195.52 million, driven primarily by a 20% increase in licensing revenue and a 74% increase in maintenance and support revenue. As a result, the company topped Wall Street consensus estimates by $8.8 million. In addition, PATH reported a Non-GAAP EPS of $0.01, beating Wall Street projections by $0.07. That’s a piece of good news. 

The bad news is that the company’s cost of revenue is rising at a significant pace. For instance, the cost of licenses as well as maintenance and support revenue increased by 49% and 122% compared to 2QFY2021, respectively. As a result, the company’s gross margin figure decreased by 700 bps year-over-year to 82% as of July 31st, 2021.

As of July 31st, 2021, the company added 2,100 new customers to bring the company’s total to 9,100, showing 30% growth compared to a year earlier. This allowed PATH to increase its annualized renewal run-rate (ARR) by 60% to $726.5 million, however, this is still down from its pre-IPO figure of 65%.

In addition, the company’s revenue growth rate slowed as well, decreasing from 81% at the IPO to 41% as of July 31st, 2021. In my opinion, the deceleration of PATH’s revenue and ARR growth was due to the increasing competition in the industry. As a result, the company may spend more on marketing activities to maintain its market share and attract new customers in an attempt to improve its margin profile and profits.

Analysts’ Estimates & Valuation

For the third quarter, analysts expect PATH’s EPS to come in at ($0.04). Moreover, analysts forecast that its Q3 revenue could rise about 6% Q/Q to $208.06 million.

When it comes to valuation, PATH’s forward Price/Sales and EV/Sales stand at 44.77x and 69.53x, respectively. These ratios are substantially above the industry benchmark of 3.83x and 4.02x.

With that being said, if the company’s revenue and ARR growth continue to slow down, high valuations could create additional pressure on the stock. 

Options Traders Are Selling Call Options

On September 10th, the open interest levels for September 17th, $55.00 call options increased by 2,698 contracts to about 2,796 (source: barchart.com). However, the options were traded near the bid side, suggesting that options were sold. For the seller of those calls to earn a premium, the stock would need to stay below $55.00 by the expiration date.

Conclusion

Although the company delivered solid growth numbers in the second quarter, in my view, it’s not enough to justify its extremely high valuations. Additionally, with increased competition from companies such as Microsoft, Automation Anywhere and Blue Prism, PATH’s market share could shrink which will slow their growth prospects.

Furthermore, options traders have a bearish outlook on the stock in the near term. 

Finally, the lock-up period expires on October 18th, which could create additional selling pressure on the stock should insiders decide to cash out stock positions. 

Hence, I believe that investors should avoid adding PATH stock to their portfolios at the moment. 

 

Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. Oleksandr focuses his trade strategy around "special situations" (such as catalysts, potential acquisitions, or spin-offs) and how to make money from those catalysts, as direct stock purchases, combined with option-based approaches for risk minimization.

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