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3 Reasons UiPath Stock Is a Buy After Raising Its Full-Year Outlook Once Again

By Nicholas Rossolillo – Sep 16, 2021 at 6:00AM

Key Points

  • UiPath's software bots are helping businesses with their employee shortages.
  • Annual recurring revenue was up 60% year over year in the last quarter.
  • The company had $1.9 billion in cash and equivalents on hand.

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The stock is falling even though results blew away expectations.

UiPath (PATH 12.46%) was a hot IPO this past spring, with the public listing of the tech stock raising some $700 million in fresh cash for the high-growth company. It's been all downhill from there, though. Shares are down nearly 23% from where they made their publicly traded debut as sky-high optimism wanes.

However, after the company's latest quarterly update, I'm finally ready to buy shares of this top software technologist. Here are my three reasons why.

Person in a business suit holding a tablet. A brain illustrated with electrical connections hovers above the tablet screen.

Image source: Getty Images.

1. An essential service for talent-strapped businesses

UiPath is in the business automation market. It develops software-based bots (called robotic process automation, or RPA), programs that can be used by businesses to automate repetitive tasks to free up time for people. Automation of human work is a controversial topic, and the decrying of technology replacing jobs is a bipartisan affair. But the effects of the pandemic -- specifically, a self-employment and small business creation boom and an ensuing wave of employees quitting -- has left many businesses in dire need of help. It seems every company large and small has a "help wanted" sign hanging on the door these days.

Software bots can't pick up all the slack, but RPA can automate quite a lot of behind-the-scenes office, compliance, and basic communications work. That's where UiPath comes in. For a growing number of customers, this technologist is a key partner in helping ease a shortage of human capital, freeing up existing employee time, and refocusing the workforce on higher-order tasks. 

Think of UiPath as a modern take on staffing agencies. With a new digital era now in full swing and cloud computing completely transforming the way enterprises operate, UiPath has an incredibly bright future ahead. Its targeted market is worth tens of billions of dollars in spending every year, so it has no shortage of growth potential.  

2. Exceptional growth, with plenty more on the way

UiPath reported an exceptional second quarter of fiscal 2022 (the three months ended July 31, 2021). Annual recurring revenue (ARR) was $726.5 million, handily beating the company's own guidance for as much as $704 million provided a few months ago. ARR was up 60% from where it was a year ago. This prompted the company to raise its full-year outlook. Management now expects ARR to be in a range of $876 million to $881 million (previously pegged at $850 million to $855 million).

Based on that prediction, UiPath expects its annualized revenue to be at least 21% higher than it was in Q2 in less than six months' time.

To be sure, UiPath is still an "expensive" stock even after the recent drawdown. Shares are valued at about 31 times expected full-year sales. Nevertheless, given how fast the business is expanding and how profitable the company could be someday (gross profit margin was 82% in Q2), it isn't a totally unreasonable price tag for those who plan to buy and hold for many years.

3. A massive war chest ready to be deployed

The greater artificial intelligence industry that UiPath operates in is going to be huge in the next decade, and there will be lots of opportunities for the company to flex its muscles and generate additional value for its users. The funds raised by its IPO earlier this year will come in handy. Thanks in no small part to the warm reception UiPath received from investors back in April, it ended July with $1.9 billion in cash and equivalents and no debt.  

Through the first half of this year, UiPath generated negative free cash flow of $27.9 million. A business operating at a loss may not sit well with all investors, but UiPath is investing in sales, marketing, and research and development. It can afford to do so, and given the rapid conversion to new revenue generation that the spending is equating to, it's money well spent.  

I tend to wait for a quarter or two of financial reports after a fresh IPO before buying a new stock for the first time (usually I start with a buy equaling less than 1% of my total portfolio). UiPath has now satisfied that rule. It's growing at a rapid pace as it fulfills a key need for its customers given the shortage of hirable employees out there. After the last quarterly update, I think the time to start buying is now.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool recommends UiPath Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

UiPath Stock Quote
$14.53 (12.46%) $1.61

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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