UiPath (PATH -1.54%), a developer of automation software for repetitive office tasks, went public in April at $56 per share. The stock price surged to $90 the following month, but subsequently dropped below its IPO price.
Let's look back at why UiPath initially impressed the bulls, why it lost its luster, and whether or not its stock is worth buying again in the low $50s.
What does UiPath do?
UiPath's software robots perform repetitive office tasks such as processing invoices, managing inventories, onboarding customers, sending out mass emails, and inputting large amounts of data by using a company's existing software. That automation enables companies to reduce their expenses, eliminate unnecessary job positions, and eliminate the risks of human errors.
The company was founded in Romania in 2005 and is currently based in New York City. It launched its first automation platform in 2013, became the world's No. 1 RPA (robotic process automation) company in 2018, according to Gartner, and retains its lead to this day.
How fast is UiPath growing?
UiPath's revenue soared 126% to $336.2 million in fiscal 2020, and it grew another 81% to $607.6 million in fiscal 2021, which ended this January. Its gross margin expanded from 71.5% in 2019 to 82.3% in 2020, then rose to 89.2% in 2021. That expansion indicates it has plenty of pricing power, but its high operating expenses are keeping its bottom line in the red. UiPath's net loss widened from $261.6 million in fiscal 2019 to $519.9 million in 2020 but narrowed significantly to $92.4 million in 2021.
Those numbers impressed the bulls at the time of UiPath's IPO. Unfortunately, its first two quarterly reports indicated its revenue growth was slowing down, its margins were contracting, and its losses were widening again.
In the first half of fiscal 2022, UiPath's revenue rose 51% year over year to $381.7 million. However, its gross margin declined year over year from 88.8% to 77.8% as the negative gross margin of its services segment offset the higher gross margin of its software segment. Meanwhile, its operating expenses skyrocketed 121% year over year, and its net loss widened from $47.9 million to $339.7 million.
For the full year, UiPath expects its annualized renewal run rate (ARR) to increase 51%-52%. Analysts expect its total revenue to increase 43% to $869.7 million this year, then increase another 33% to $1.16 billion next year. It will likely remain unprofitable for the foreseeable future.
Even after dipping below its IPO price, UiPath's stock still looks expensive at 30 times this year's sales. That high valuation, along with the company's slowing growth and lack of profits, caused its stock to lose its luster.
But don't ignore UiPath's strengths
It's easy to dismiss UiPath as another overvalued tech IPO, but investors shouldn't overlook its underlying strengths.
The company ended the second quarter with over 9,100 customers, compared to 7,968 customers at the end of fiscal 2021 and 6,009 customers at the end of fiscal 2020. It achieved a dollar-based net retention rate of 144% over the past 12 months. That marks a slight dip from 145% at the end of fiscal 2021 and 153% at the end of 2020, but it's still a very high net retention rate compared to other software companies.
For example, Cloudflare (NET -4.68%), the high-growth cybersecurity and content delivery network (CDN) services provider, posted a dollar-based net retention rate of 124% last quarter. Snowflake (SNOW -3.20%), the cloud-based data warehousing company UiPath recently teamed up with, ended last quarter with a net retention rate of 169%.
UiPath's current contracts will also buoy its near-term growth. Its remaining performance obligations (RPO), which gauges the remaining value of those existing contracts, rose 80% year over year in the second quarter.
But is UiPath's stock worth buying?
UiPath's current and near-term growth rates indicate its stock is still overvalued. However, the RPA market could still grow at a compound annual growth rate of 32.8% between 2021 and 2028, according to Grand View Research.
If UiPath merely matches that projected growth rate, its annual revenue could rise from $1.16 billion in fiscal 2022 to $8.45 billion in fiscal 2029 (which includes most of calendar 2028). If it outpaces the broader industry's growth, it could potentially generate more than $10 billion in revenue in fiscal 2029.
Investors who believe the RPA market will continue expanding can consider accumulating some shares of UiPath right now. However, I'd personally avoid this stock until its valuations cool off a bit more since there are plenty of other high-growth stocks trading at more reasonable valuations.