What happened
Shares of recent IPO UiPath (PATH 0.77%) rose 10.9% in May, according to data provided by S&P Global Market Intelligence. The stock's performance matches the return of the Renaissance IPO ETF (IPO -0.74%), which has outperformed the S&P 500 over the last few weeks.
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So what
When UiPath went public on April 21, investors were clamoring for newly listed companies. Shares of the software company jumped 23% on its debut. However, in late April and early May, sentiment on IPOs, high growth stocks, and special purpose acquisition companies (SPACs) turned sour, with many companies' shares falling 10% or more in a short time span.
For example, ARK Innovation ETF (ARKK 0.07%), one of the most popular growth exchange-traded funds (ETFs), went from around $125 a share to under $100 in late April and early May. Since then, along with the Renaissance IPO ETF, the ARK Innovation ETF has recovered some of its losses, currently trading at $112 a share.
These movements by the broader market were likely the reason shares in UiPath rose more than 10% in May. The company did not release any earnings reports during the period, and investors were already aware of the company's financial situation at the start of the month, with its historical financials publicly available before its listing in April. This indicates UiPath's price movements were just due to broad market volatility -- not because the business got better or worse during the period.
Now what
Investors seem attracted to UiPath because it is a high-margin and fast-growing software company. The company has grown its annual recurring revenue (ARR) at an 86% compound annual growth rate (CAGR) over the last two years, and it has high gross margins of 89%. The combination of high revenue growth and strong gross margins is likely giving investors confidence that UiPath can be extremely profitable once it matures. It likely has strong customer lock-in, too. UiPath's software embeds itself in employee software applications, and its machine-learning algorithms help businesses automate tasks, increasing work efficiency and decreasing time spent on repetitive tasks.
However, even though UiPath looks like a promising business, with the stock up over 10% in May, it now trades at an exorbitant valuation. Based on its current market cap of around $40 billion, the stock has a price-to-sales (P/S) ratio of 66, which is more than five times where the average software stock trades at. UiPath may deserve a premium valuation due to its high growth potential and gross margins, but with such a high P/S, investors should probably stay away from UiPath at the moment.
