A Deep Dive Into UiPath

In this episode of Industry Focus: Tech, host Dylan Lewis and Motley Fool contributor Brian Feroldi talk about UiPath (NASDAQ:PATH) and how it serves the robotic process automation market, the insane growth rates the business is posting, and why it reminds them of recent IPO Snowflake (SNOW -1.61%).

Editor's note: This podcast was recorded before UiPath started trading on Wednesday, April 21.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 9, 2021.

Dylan Lewis: It's Friday, April 9, and we're talking about an automation S-1. I'm your host, Dylan Lewis, I am joined by fool.com's uniquely unqualified underwriter for uncovering anti-underperforming utility units, Brian Feroldi. Brian, how are you doing?

Brian Feroldi: Dylan, happy Friday to you. How is it going?

Lewis: I can't complain, man, we get to do this all the time. It's so fun to tape the show with you and we got a prospectus on our hands. There has been no shortage of really interesting companies. I don't want to overstate it, but I think that the one that we're going to be talking about today, based on that alliterative, people can tell it starts with a U. Probably one of the more interesting ones and maybe one of the most immediately investable ideas we've talked about in awhile.

Feroldi: Yeah. When I dug through the S-1 on this company, there is definitely a lot to like, and you called this out in a private conversation we had: You think this could be Snowflake 2.0. Given the numbers we're about to say, I don't think that's an unfair comparison.

Lewis: Enough intrigue. The name of the company is UiPath and the proposed ticker symbol is PATH. If you're in the tech business, UiPath might make sense to you as a name; it plays into what they do. But Brian, this is a company that is focused on robotic process automation. It's probably a little jargon heavy for some of our listeners.

Feroldi: That absolutely is. Let's start with the company's mission that always should give you a good idea of what the company's trying to do. UiPath's mission is "To unlock human creativity and ingenuity by enabling the fully automated enterprise and empowering workers through automation." In very simple terms, they provide automated software solutions that can be deployed and used by non-technical people or, to say even simpler, they make software robots so that people don't have to be robots.

Lewis: Yeah, it's kind of interesting to think of people as robots. That might cause some people's brains to hurt a little bit with that classification. But I think breaking it down is helpful: RPA, the robotic process automation that they are focused on. This is really the core business and the enterprise issue that they are trying to solve. I want to get definitional here because I think it helps clarify what this is. If you break this down, we have robotics, this is something that is capable of being programmed by a computer to do a task; you have a process, which is a series of steps that lead to an activity; and you have automation, which is when a task happens without any human interaction. If you put all of those together, you are taking something that's capable of doing something automatically, laying out the steps for how it does it automatically, and then allowing it to automatically happen without any human intervention. When we do this, Brian, we're primarily focusing on very rote automated tasks that have been worked out in all of the workflows that have been figured out.

Feroldi: Yes. I think that everybody here, even if you're a knowledge worker, does have some repetitive tasks in their jobs: filling out forms, pulling in data, integrating information, etc. There are still a ton of repetitive tasks that knowledge workers do that don't necessarily add a lot of value. UiPath's goal is to create easy-to-use software robots that can be deployed by essentially anybody in an organization to take the automated mundane tasks out of their lives so they can focus on higher quality work.

Lewis: Yeah. I think if you are having a hard time understanding how this might come together for an office worker, if there's anything that you are manually copying and pasting or taking from one form and putting into another system, those are precisely the tasks that RPA can help out with.

Feroldi: Yeah, exactly. What's notable here is that this company has a lot of third-party industry rankings that really point out that it is the leader in the industry. If you look at Gartner, they call out UiPath as the top dog in RPA; Forrester calls out UiPath as the clear leader in the industry. Those are some heavy hitters that are backing this company up.

Lewis: As we often say, Brian, when we kind of get what a business does but maybe don't quite have a good grip on the technical elements, we always like to see the industry endorsements. That always helps us and gives us a little bit of confidence.

Feroldi: That and the numbers, too. We usually [laughs] let the numbers do the talking and we'll get into that in a little bit. But if you talk about this company's actual solutions, yes, in their S-1, they have all the buzz words that are meaningful today. Yes, they say AI, machine learning, API integration, or low-code automation, etc. But they have a number of products that can basically be broken down into seven primary automation functions. 

The first one would be what they call discovery. This is when they use AI tools and desktop recording to find repetitive tasks that are being done by knowledge workers that robots could do. The second bucket is products that build the tools that actually handle the coding. The third is a group that is called management and that's where the tools can be tested and deployed. Fourth is the runtime. The actual running of the tools themselves, so that it all happens behind the scenes. Fifth would be engagement, and this is actually a key point here. These tools aren't necessarily just to replace the tasks that humans do but also to augment them. UiPath wants its robots and humans to co-exist together so that they can complement each other. That's what the engagement function does. Sixth would be measurement. It's important to have feedback and analytics to make sure that you can actually have numbers to back up that these tools are helping you and making you more productive. The seventh would be a government to make sure that everything is safe, secure, and making sure that access is restricted. So that is, broadly speaking, the seven categories that UiPath breaks up its tools into.

Lewis: Yeah. Brian, I think if you're an outsider here, this can sound a little dystopian very fast. The idea of a robot for every human or heavily automating a lot of things that are currently being done by workers. And I want to circle back to the mission here for a second for the company because I think it's crucial in how they're positioning themselves with their customers. They say, again, to unlock human creativity and ingenuity by enabling fully automated enterprise and empowering workers through automation. Then, the interviews that I have seen with their CEO, for the most part, the focus is we are removing things that are boring, rote, difficult because they are so manual and could be automated. The goal being we want to free up more of the creative work, more of the moments where humans really can add value to something within normal workflows. That's analysis. In some cases, that's creative work. But the pitch from this company is we are not replacing people. We are trying to free them up to do work that is a little bit more filling and also where they're more valuable, honestly.

Feroldi: The pitch from UI is, essentially, we want to give every single employee that you have an assistant that can handle all of their mundane tasks, which can free up your employees to do other things. At least, that's the pitch at a very high level.

Lewis: Yeah. Now, I mean, when you get more efficient, that does mean often more work wants to come in your way. I think some of the concerns are warranted, but that's at least how they're angling themselves. Yeah, I think the assistant is a very helpful metaphor for thinking about how this company is positioning itself for customers and really how users can think about it.

Feroldi: Now, this company was founded in 2005 and it's been deploying its solutions for more than 16 years. What I found interesting is that while this does have some SaaS-like qualities to it, it is not a pure-play SaaS company. They actually sell their software, both using a Software-as-a-Service model, as well as the legacy licensing model. If you look at their revenue from their most recent quarter, about 60% of their revenue comes from licensings. Those can be term deals where they have a start date and an end date or a perpetual where you just buy it and then you have it for that software as long as you want. That is still about 60% of total revenue. About 35% of this company's revenue is from a category that it just calls maintenance and support for their licenses. Finally, the final 5%, they do also have a professional services component. That is a loss leader for this company where they essentially send in consultants to their customers to help them get running, and the gross margin on that is actually negative. The benefit of using this model is that it can be completely adaptive to however the customer wants it. If the customer wants it all on the cloud, they can do that. If they want it all on-premise, they can do that. If they want a hybrid between the two, they can do that. If they want it in the private cloud or the public cloud or a combination, they can do that. UiPath really tries to meet the customer at the level that they want to be at.

Lewis: Yeah. I am glad you dug into the SaaS versus licensing here because it is easy to assume a lot of the companies we talk about, especially if they have a cloud element to them, default to SaaS, right? We've seen just how powerful the model is. We need to specifically highlight when that's not the case because we know it's a very attractive business model, and my hunch is we probably see SaaS as a much larger piece of the pie in the future for this company than it is currently. But that's, in some ways, an opportunity for them and something that they'll probably build into rather than how they're currently composed.

Feroldi: As much as we talk about the cloud and SaaS, Dylan, it's really amazing even still today how small SaaS is when compared to overall software usage licensing. I have no doubt that 10 years from today, almost everything will be SaaS and in the cloud, but for now, we're not quite there yet.

Lewis: I want to talk financials and give people a sense of the scope of this business because I'm guessing a lot of people have never even heard of the name UiPath. We talk about a lot of IPOs, our branding and marketing events. I think that's going to be the case for this business, but it is not a tiny one at this point, particularly when you think about the scope and all the companies they work with, but their top line is pretty sizable already.

Feroldi: In fiscal 2021, which was basically the year 2020, this company had a fabulous year or, should I say, another fabulous year. The top line grew 81% to $608 million. That is a very sizable number on its own right and equally impressive is that growth rate, 81%. I mean, that puts it in rare company. We're talking like CrowdStrike, Datadog, Shopify level, so a really impressive topline number.

Lewis: Yeah, and crucially, Brian, a lot of that money keeps flowing down to the bottom line. We see a gross margin with this business of 89%. Things get a little bit uglier when you go over to operating margin, as you might expect for a high-growth business. It's currently negative, but a lot of the core elements that we like in a business.

Feroldi: Totally. Yeah, the gross margin here was 89%, which is even more impressive when you consider that 5% of its revenue is negative gross margin, that percent, that professional services. That just shows you how unbelievably high-margin the software is. Net loss last year was $92 million at least on a GAAP basis. But if you look at free cash flow, free cash flow was actually positive $26 million, so that's just the difference between GAAP and the free cash flow. Financially, extremely strong. To your point, prior to coming public, the last balance sheet that we got from this company shows $474 million in cash, and they do have $1.2 billion in preferred common stock. More often than not, that does get converted to equity in an event such as an IPO. But yeah, there's no doubt that this company is extremely financially strong. Therefore, it's not coming public because it needs to. It's coming public because it wants to.

Lewis: Yeah. Brian, even further, if I'm not mistaken, the prospectus has the balance sheet as of Jan. 31, 2021. I know that they had a funding round. I believe it closed in early February. It might have been Feb. 1, which would mean that there is even more cash than what is currently shown on the balance sheet. Don't quote me on that, but I think it's true based on the timeline that I've seen with reports.

Feroldi: That will be fair enough. Either way, the company has plenty of capital, plenty of liquidity, but to your point I do think this is a marketing event for the company. The other number which I can't believe we've put this far down in the script, shame on us, UiPath has a net revenue retention rate that is ridiculously impressive: 145% -- and yes, retention that includes churn.

Lewis: Yeah. I think I can maybe come up with one or two other companies that have touched that with their prospectuses, and I think it's Datadog, maybe I don't even have a second one, Brian.

Feroldi: Yeah, that puts them in rare air, and equally it's important to remember what the scale we're talking about here. This is an upstart SaaS that is just getting started. This is a company that's been around for 15 years and is on pace to do over $600 million in revenue this year. That makes that number even more impressive.

Lewis: Yeah. And that timeline might be a little confusing to people, Brian, to hear this explosive growth and have never heard of this company. Part of it is I think UiPath for a while was trying to figure out what exactly the core business was. They went through a couple of different transformations and ultimately landed on RPA, realized by accident in some ways that they have a very effective product, and then focused their entire business on it and immediately became a category leader. That's why for as long as the company has been around, we're only seeing this massive growth really in like the last five or so years and really seeing it become a much more relevant industry player in the last decade or so.

Feroldi: And that's the thing that we see with a lot of successful companies. They start out with one idea in mind and they have to continually jig the business model until they hit upon something that really resonates with the market, and based on the numbers they've done just that.

Lewis: Yeah. If you look over a lot of industry lists, if the financials weren't enough, there are a lot of accolades. In April 2020, UiPath was named the top tech company and No. 2 overall in Financial Times, FT1000 ranking of America's Fastest-Growing businesses -- no surprise with that growth rate. UiPath was also named CNBC's 2020 disruptive 50 ranking and No. 3 on Forbes Cloud 100 for the second consecutive year. So a lot of people in the industry are watching this business, Brian.

Feroldi: Understandably, given the numbers that we're talking about as we said at the top of the show. It's going to be interesting to see what valuation this company pulls, and it would not be surprising at all if we saw Snowflake-like a day one results.

Lewis: Yeah. Just to give a quick history lesson on where they've been as a private company. They raised at a $1 billion valuation in 2018, and then $3 billion later in the same year; 2019 they raised at $7 billion, 2020 they raised at $10 billion, and earlier this year they raised $750 million in their Series F, which valued them at $35 billion. And so, Brian, that is a 30-bagger in about three years, which is absolutely wild.

Feroldi: It just shows you how crazy undervalued they were in 2018 when they raised that $1 billion. Yeah, if their private valuation is $35 billion, what kind of number are we going to possibly see first off at the IPO and then when so much trading actually starts. Snowflake was a few 100 times sales if memory serves. We're not anywhere in that ballpark but could we be? Maybe.

Lewis: It wouldn't be crazy. We're at basically 60 times trailing sales based on their most recent private valuation round. I have to imagine once we go through the actual public offering, the premium is going to be even higher. I wouldn't be shocked if it winds up touching triple-digits at some point, with a lot of market enthusiasm behind it. Part of that is, at least for Fools, there's another really strong sign with this one and that's the fact is this is a founder-led business.

Feroldi: The CEO and co-founder is still in the corner office. His name is Daniel Dines. He founded this business 16 years ago in Romania actually. All the usual checks that we go through really suggest that he has done a fabulous job. Not only has the growth been absolutely torrid, not only are they hiring new customers and getting existing ones to spend more. UiPath also gets pretty darn good Glassdoor reviews. If you look over Glassdoor, a few 100 people have given the CEO an 87% approval rating, the company itself gets four stars out of five. While we don't know the exact ownership or breakdown for this company, that will be jigged around based on how many shares it converted, etc. We do see that Daniel Dines owns 100% of the Class B stock for this company, that is super voting stock that we've seen go to many founders, and he basically owns 100% of that. Prior to coming public, he controls 91% of the total voting power of the company. So this is going to be his company, but you can't say that he doesn't have skin in the game because he is going to own a significant amount of this business.

Lewis: Yeah. It's hard to argue with the track record and the growth that we've seen so far. The more I read about this business, and you mentioned this when we talk about the revenue in the top line, the scale they're operating on -- the more I read the more I'm amazed that I didn't know about this company before you pinged me with the S-1 saying we'll talk about, because they have some huge partnerships and they have a huge customer base already.

Feroldi: Yeah, they've got almost 8,000 customers that they signed on. Yes, they are targeting enterprises and boy, have they landed some big ones. They claim to have 80% of the Fortune 10, 63% of the Fortune 500, and they have over 1,000 customers that will pay them over $100,000 at annual recurring revenue each year. This includes in their S-1 when they call it many big partners that we know, Adobe, Chevron, Chipotle, CrowdStrike, CBS, Takeda, Uber. A wide range of customers that are in all facets of the market.

Lewis: I'm going to add an asterisk. I think it's 80% of the Fortune 100, that might be a typo in our outline. Because that's the number that sticks out to me, but either way, we're talking about a huge imprint in what we know to be businesses that have a lot of spend and certainly companies that benefit tremendously from precisely what they're offering. It's a good sign for the industry and another proof-of-concept for them. In spite of all of that, having a huge customer base already, having massive contracts and installed basis in place already Brian, there's still a really compelling revenue opportunity in front of them.

Feroldi: IDC estimates that the market that this company competes in is currently worth about $17 billion. As a reminder, this company did about $600 million in revenue over the trailing 12 months. What's more important is that the entire market for the service is growing rapidly. IDC estimates that it's currently growing at about 16% annualized clip, so that's adding billions of dollars in TAM every year. If you look at the company, the company actually believes that that significantly understates its current market opportunity. It says if you look across the world at all the companies that have 200 employees or more that could potentially adopt our services, they believe that the TAM is currently $60 billion and growing rapidly. If you believe that, that means they've captured 1% of their current market opportunity. But if this company does not work out as an investment, it's not going to be because the opportunity isn't there.

Lewis: Yeah. There's clearly green field here in front of them. What I think is so encouraging when you see a business that already has a pretty big presence with companies that have a lot of spend and are willing to put money at ideas that make them more efficient is when you see such a strong dollar-base net retention number. Because that means the use case is there, once customers are in, they continue to grow and continue to find more ways to integrate this software solution into what they do on a day-to-day basis.

Feroldi: Exactly. If they can prove it out with a few employees and they can clearly get value, as we said at the top of the show, this is a company that wants essentially every knowledge worker to have their own robotic assistant. You could see that number continue to stay strong if they can deliver.

Lewis: Yeah. That is, as you might imagine, something that has attracted a lot of other people to this space. Anytime you see huge growth rates, people tend to perk up and say, maybe we should get into business doing that. Of course, UiPath was not the first company in this space. They came into something that already had some players and very quickly became one of the go-to providers. We did mention that they are one of the top dogs. I will say Automation Anywhere is another very highly regarded company in the space, and I think it's basically UiPath, Automation Anywhere, and then the rest of the field when you're looking certainly at industry rankings.

Feroldi: You shouldn't overlook, "the rest of the field," because that includes companies like Microsoft, Pegasystems, NICE Systems, SAP, WorkFusion, etc. But, yes. So far, UiPath has proven to be the top dog in this space, and as it's revenue growth improves, boy, is it doing a great job at maintaining that leadership position. That is absolutely a risk to watch, that if it's growth rates were to slow in the near future, that could be painful for shareholders.

Lewis: Brian, putting all this together, we have a company that we are loosely calling Snowflake 2.0. [laughs] And I think having gone through a lot of the core business numbers now, a lot of our listeners might even agree. This is a really compelling investing idea. High growth, great retention rates, interesting industry opportunity in front of them, founder-led business, seems like it has a really great culture. I think there's going to be a lot of enthusiasm behind this IPO, even though it's a name that a lot of people might not have heard of.

Feroldi: If you didn't know anything about the valuation, Dylan, is there a metric that we talked about that you did not like?

Lewis: No, it all looks great. [laughs] Even the gross margin, the growth rates, the [dollar-based net expansion rate]. It's all fantastic.

Feroldi: Exactly. Yes, this company checks all of the boxes that I look for. There's actually no customer concentration risk. We didn't actually get into that before, but man, is this a compelling investment. The tricky thing is going to be Wall Street is clearly onto this name and how big is the valuation for this company going to be after it becomes public? Man, was Snowflake priced at a very high number. There's no doubt in my mind that this thing is going to be too. If in the private markets it raised capital at 60 times sales, what's going to happen when they enter the public markets? This is definitely a company that I'm going to watch, I'm going to put it on my radar. I probably won't be a day one buyer, but would I be a quarter three or quarter four buyer? Maybe.

Lewis: Yeah. These are growth rates that are hard to ignore. I think there are probably some investors out there, Brian, that got bit a little bit by the enthusiasm behind Snowflake, where there was all of the fanfare around the IPO. We found out that Warren Buffett was an investor early, able to get in I think at IPO price. When you see Buffett getting into tech, [laughs] there's all kinds of excitement. That's such a signal for so many people. The shares are down, I think, about 30% from high or something like that. Anyone who's investing in that company is doing it because the long-term tailwinds are just so great and too big to ignore. But there might be a little bit more of a tepid reaction because of that. My guess is not, though. We tend to see people get really excited when something like this comes public.

Feroldi: Yeah, I'm looking at Snowflake's chart right now and it looks like they're down about 11% from their IPO price. Significantly more to that if you were unfortunate you have to buy at the high, because Snowflake actually performed pretty darn well after it came public. I never have a problem paying a very high valuation for a company, my problem is more just a pure market cap of this thing. Will this be a $100 billion company? Will it be a $70 billion company? Will it be a $50 billion company? That I don't know. I also don't know how big could this company become if everything just worked out beautifully. How much truly upside is there for investors? If I was going to take a position in a company like this, I would have to believe that multibagger returns are possible. Either way, it's definitely going on my watchlist.

Lewis: Yeah, same for me. And to your point, we know that this is going to be debuting in the tens of billions valuation. We've seen a lot of companies go from $50 billion to $300 billion, [laughs] and quality businesses seem to have a way of doing that. But it does mean that getting big fast is a little bit harder, and when you see growth rates like this that's a hockey-stick movement in its valuation over a very short period of time. I think it sets people up for really tough expectations when it comes to the performance of the company. Doesn't mean it's not a really high-quality business though.

Feroldi: Very high-quality business, and I understand why Wall Street is going to be excited about this thing. Hey, I'm happy we could talk about it today.

Lewis: Yeah. And you know what, Brian, if we see the news item that Warren Buffett winds up getting into UiPath, we will know that he is an Industry Focus listener.

Feroldi: [laughs] That's exactly right. Actually, I would vastly prefer to see Charlie Munger take the position in UiPath prior to coming public.

Lewis: [laughs] Brian, we'll have to keep our eyes peeled for that. Thank you so much for joining me on today's show.

Feroldi: Thank you, Dylan. Have a great weekend.

Lewis: You too. Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say "Hey," shoot us an email at industryfocus@ fool.com, or you can always tweet us @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes or wherever you get your podcast, Spotify, Stitcher. You name it, we are there. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for all his work behind glass today, and thank you for listening. Until next time, Fool on!