UiPath's (PATH 0.05%) stock price plunged 14% during after-hours trading on March 30 following the release of its fourth-quarter earnings report.
The automation software developer's revenue rose 39% year over year to $289.7 million, which beat analysts' estimates by $6.5 million. Its adjusted net income declined 43% to $27.2 million, or $0.05 per share, but still exceeded analysts' expectations by two cents.
UiPath's headline numbers weren't disastrous, but its stock now trades more than 50% below its IPO price of $56 a share set last April. Should investors consider buying this beaten-down growth stock near its all-time lows?
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How does UiPath make money?
UiPath's software "robots" can be integrated into an organization's existing infrastructure to process invoices, manage inventories, onboard customers, send out mass emails, enter data, and perform other repetitive tasks. Automating those tasks can help organizations cut costs and operate more efficiently by eliminating human errors and unnecessary job positions.
UiPath became the world's leading robotic process automation (RPA) company in 2018, according to Gartner, and it remains the leader in that niche market. Its basic subscription plans cost between $420 and $1,930 per month for small teams and businesses, and it provides more expensive options on a case-by-case business for larger customers.
How fast is UiPath growing?
UiPath's revenue surged 126% to $336.2 million in fiscal 2020, which ended in January of this calendar year, and rose 81% to $607.6 million in fiscal 2021. Its revenue grew another 47% to $892.3 million in fiscal 2022, while its annual recurring revenue (ARR) rose 59% to $925 million.
But for fiscal 2023, UiPath expects its revenue to rise just 20%-22%, which broadly missed analysts' expectations for 32% growth. It expects its ARR to grow 30%-31%.
The company attributed that deceleration to three main headwinds. First, it expects the suspension of its business in Russia in response to the Ukrainian conflict to reduce its ARR by about $15 million for the year. Second, it generates about 30% of its revenue in Europe and remains heavily exposed to the strengthening of the dollar against the euro. It expects those currency headwinds to reduce its ARR by another $20 million-$25 million.
Lastly, CFO Ashim Gupta said the company was making "prudent assumptions around the profile of large deals" in its pipeline during the conference call.
On the bright side, UiPath still posted an impressive dollar-based net retention rate of 145% in the fourth quarter. Most of the 2,000 customers it added during the year were also larger businesses.
Its number of customers that generated more than $100,000 in ARR rose 50% year over year to nearly 1,500, while the number of customers that generated more than $1 million in ARR increased 78% to 158.
A few more red flags have appeared
UiPath's slowing revenue growth is worrisome, but a few other red flags have also appeared. First, its gross margin declined from 89% in fiscal 2021 to 81% in fiscal 2022 on a generally accepted accounting principles (GAAP) basis. On a non-GAAP basis, its gross margin fell from 90% to 87%.
It mainly attributed that margin compression to its higher investments in its services and cloud hosting infrastructure, but it could also suggest that UiPath's pricing power has already peaked in its nascent market.
That would be bad news because it remains deeply unprofitable by GAAP measures. Its net loss narrowed from $519.9 million in fiscal 2020 to $92.4 million in fiscal 2021, but it widened again to $525.6 million in fiscal 2022.
It squeezed out a positive non-GAAP operating margin of 8% in fiscal 2022, compared to a negative 4% in 2021, but the midpoint of its guidance implies its non-GAAP operating margin will drop back to about 0.5% in 2023, even as it takes a more "measured" approach to increasing its headcount.
Meanwhile, the company's excessive stock-based compensation (58% of its revenue in fiscal 2022) has caused its weighted average share count to more than double between the first and fourth quarters of the year.
That ongoing dilution is worrisome, because UiPath's stock still isn't a screaming buy at 14 times this year's sales. For reference, Twilio (TWLO 1.45%) -- which expects its organic revenue to grow by at least 30% over the next few years -- trades at just eight times this year's sales.
Lastly, UiPath's chief revenue officer Thomas Hansen just stepped down and will be succeeded by Chris Weber, a former Microsoft executive who will become its new Chief Business Officer. That major transition could either breathe fresh life into UiPath's business or cause unforeseen challenges.
UiPath isn't a compelling investment yet
UiPath is still growing, and its automation software has plenty of disruptive potential. However, its decelerating growth, declining margins, ongoing dilution, and unattractive valuation make it tough to recommend -- even though it's trading at a significant discount to its IPO price.
