Automation technology specialist UiPath (PATH -0.42%) was a hot IPO when it went public in April 2021, but a sky-high valuation has kept the stock in a steady decline ever since. Share prices are now down nearly 40% from their public debut.
Nevertheless, the business itself is still growing by leaps and bounds, and UiPath's software bots are helping customers solve pain points arising from employee shortages and other effects from the pandemic. I plan to continue adding a few shares to my currently small position after the third-quarter earnings update.
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Momentum in automation continues
UiPath's Q3 fiscal 2022 (the three months ended Oct. 31, 2021) was rock-solid. Annualized recurring revenue (ARR, a key metric for subscription-based cloud computing services) increased 58% year over year to $818 million.
Through the first nine months of the current fiscal year, free cash flow was negative $57.6 million, but that is largely by design as the company spends heavily to maximize its expansion potential. Eventually, this should be a highly profitable firm. Adjusted gross profit margin on services rendered in the third quarter was at 85%. And in the meantime, UiPath can handily afford to spend slightly more than it hauls in each quarter in sales. It ended October with $1.9 billion in cash and short-term investments and no debt.
For the final quarter of the year, management boosted its outlook for ARR to be at least $901 million (previously pegged at as much as $881 million), a quarterly sequential increase of 10% and a 55% increase from ARR at the end of last year.
Clearly, UiPath is riding strong momentum in year two of the pandemic as organizations around the globe look for technology to make their existing workforce more efficient.
Why I'm buying this "falling knife"
Though the stock price has fallen substantially this year, I'm still a buyer for the ultra-long term. Investor optimism had gotten too far ahead of itself early this year, and UiPath's valuation was due for a reality check. Even after the fall and its strong revenue growth, shares trade for nearly 24 times current-year revenue to enterprise value, so this still isn't a cheap stock. But given the massive technological secular trends it's riding, I think UiPath will continue to grow at a rapid pace for years to come.
Given the premium valuation, however, the stock could continue to fall for a while. Thus my measured approach to buying. I made my first purchase late in the summer of 2021, and have continued to nibble here and there since. However, UiPath is still less than 1% of my total portfolio, and will likely remain so for some time as I slowly add to my position. Hot IPO stocks are especially volatile in their first year of trading, but if the growth story endures, sooner or later the share price will start to follow the actual business's trajectory.
With big enterprises around the world struggling to find enough employee talent, UiPath's software-based bots used for automation are quickly becoming a must-have tool. And with only a little over 9,600 total customers (only 1,363 of them large customers contributing more than $100,000 in revenue annually), UiPath has plenty of potential ahead of it as it continues to spread the word about its tech platform. I plan on buying another small batch of this top stock before 2022 gets underway.
