Is UiPath Stock a Smart Buy?

UiPath (PATH -3.65%) specializes in robotic process automation (RPA), a technology that seeks to boost workplace efficiency with software robots. Notably, RPA is the fastest-growing segment of the software market, and UiPath has been recognized as the industry leader by both Gartner and Forrester Research.

In this Backstage Pass video, which was recorded on Nov. 8, 2021, Motley Fool analyst Asit Sharma shares his thoughts on this tech company. Motley Fool contributor Danny Vena is also in this clip.

Asit Sharma: I want to talk about UiPath. This is symbol P-A-T-H. I'm going to pull up some slides here in just a second. Make sure I've got them lined up. Actually, I'll start with just one PowerPoint slide here.

What is UiPath? It is a leader in robotic process automation. That doesn't mean that the company is physically manufacturing robots and learning how to automate them. This is referring to robots in the virtual space. Basically, if you think about processes that we all go through in our daily work, this company helps automate those tasks it uses computer vision to understand what we're doing as we go about work. It creates robots that can take over those tasks.

Now, this maybe sounds on some level for those of you who are into Excel, something like macros in Excel. Maybe that's the precursor concepts for those of you who remember back in the day in a Microsoft product, having the computer record a couple of steps and then being able to hit the macro button and have those steps perform themselves. This is something like that, but it has a layer of artificial intelligence and machine learning that the old macros that we might have been used to years ago don't. What I like about the company, just a few big points you can see on my screen. It's got a really fast revenue growth rate. Not a small company. It's annualized recurring revenue component, that is the part that's built-in, predictable cash flows. That businesses growing at a rate of 60%. The total of that annualized recurring revenue is over $700 million at this point in time. This is not a small company either. I like that it's got a very high gross margin, but you have to take that with a grain of salt, as we'll take a look in a moment. I just want to walk through, quickly, a couple of financial pages.

Gross margins, just one point of the game when you are scaling your business, you want to keep that gross profit margin high. At some point it's got to translate into bottom line profitability. This company is going after market share. The gross margin is helpful because that profile is a bit higher than you might expect given that it's got a few competitors in the space. Microsoft increasingly is going to be a competitor in the coming years. Even a big company which I love ServiceNow, which is an extremely disciplined outfit run by a great team of people and very fierce competitors in the enterprise. They purchased a company last year called Intellibot. It might've been earlier this year, trying to remember. They are also playing in this space now.

I had a chance to talk to a Gartner analysts -- this is the research company -- about UiPath. This person who's an expert in this related field said, look, there's only two companies that could push UiPath out of its lead position. One is Microsoft, the other is ServiceNow. I'm almost worried less about Microsoft than I'm about ServiceNow, because ServiceNow is one of the biggest software-as-a-service (SaaS) companies in the world, pure-play SaaS companies. They could be a great competitor. But outside of that, UiPath has placed quite a trail. Love that it's founder-led CEO Daniel Dines has a great back story. He was a Microsoft executive, left the company, and pretty much went back to his native country of Bulgaria and founded this company, grew it there in isolation from the typical Silicon Valley environment. Worked on various iterations and stumbled on the idea of RPA, which at the time the company was founded, it's about I think 10 years old now, was not as big a deal in the process world.

Yeah, I like this. I think that the strategic edge, if you're looking for it, is that it's focused on something called the attended part of the RP market. You have unattended bots that go out and do their thing once they learn a little bit about you. Then you have attended bots which follow you much more closely try to learn in more detail what you are doing that is a harder level of AI and machine-learning automation to scale. It's more intensive in terms of capital requirements. It's going to be a longer road for them, but that's where they're focused now. That's why I think for anyone who says, there's a lot of competition in this space. It's just going to be like a commodity business and UiPath can't compete. But I'd say what's pay attention to how much they're putting into the harder of the two types of RPA tasks.

See if I could just quickly look at two things on their investor presentation. Then I'll walk us through some financials. I've got a couple of minutes left, Danny? Is that right? Trying to keep this to two minutes.

Danny Vena: Sure.

Asit Sharma: Cool. This is just from their most recent investor presentation. I think this will do a better job than I did of trying to explain what they do. Their software robots emulate you and me. See, the computer vision. It reads what's happening. The machine itself has what's called a thinklayer. It's really more like a compute layer, but it's based on understanding what I need to get done. Picture me as an accounting clerk, which I was a long time ago in my career trying to process purchase orders, which I did manually by hand back in the day.

Danny Vena: Back in the day. [laughs]

Asit Sharma: This software, if I had it at that time, would have watched me do what I was doing. Once I tried to translate that on a computer, let's say I built it on a spreadsheet for my boss back in the day. It would've watched this and then would've helped me pull data that was coming in from vendors and also as I communicated with my accounting department, it would automate that tasks for me so I can move on to something else, so there is a weird side to this AI. It's a question we have to answer as we go along. Does this totally pull people out of work? Does it help them to go onto better tasks that are more meaningful perhaps? I lean right now to the side that helps make work better. It takes out the boring, manual, repetitive tasks that just emphasize the routiness, and draftiness of office work. They help us focus on past where we can add value to an enterprise.

Now, does this mean that some jobs will be lost the more companies integrate software like this. I think that's also true and we have to pay attention. I wouldn't want to be an investor in the company that was using software like UiPath software only to cull out people and just purely make a profit. I try to avoid doing that anyway. Finally, do to the way RPA interacts with other applications using application program interfaces -- I can never get that acronym right on the first try. It's got this whole layer that's automated, not just within the context of the worker, but in trying to communicate with other applications that the worker might use. Let's say I check my Slack; it sees me doing that. It can integrate with other software. Now let's just briefly take a look at some financials I wanted to show you didn't want to gloss over this. This is a money losing business at the moment and it's the cash burning business.

You see that they have really high revenue growth. I mentioned that 40% growth rate on the top-line. But at the same time, gross profit isn't growing quite as quickly. It's a nice jump in gross profit. I should say that looks pretty good to me. What we have here, though is huge expense on the sales and marketing side. R&D tripled period-to-period, G&A expense more than double. Now part of this has to do with still the residue going public. But you see that had a massive operating loss in the first six months of this year.

Now, on the flip side, I should say that, going back to some stats they give in their investor presentation, it's actually not a bad strategy. This customer base is huge and growing. The company has this super high dollar-based net retention rates, so customer spend more with it every year When you think about those two statistics together and add into that annualized recurring revenue component, I was talking about. The fact that they are selling more and more into Fortune 50 type companies. Then it's a type of organization that is already showing its promise. You can be OK with that operating loss; it's something to monitor. Before I stop sharing my screen, let me see if I can go to the balance sheet just to show that due to their IPO, they're already in a fairly decent financial shape, but even more so now. They've got about $2.2 billion in current assets versus let's round this to $400 million in current liabilities. So $1.8 billion bucks of working capital with no debt on the books. They have a lot of resources to burn some profit and cash as they gain that market share. As I mentioned, net cash negative, so taking up a little bit of cash flow, not producing it. I expect that to gradually improve over the next few quarters.