UiPath (PATH 0.77%) and DocuSign (DOCU 1.02%) burned a lot of investors over the past few months. UiPath went public at $56 last April and surged to an all-time of $85.12 the following month, but it now trades at about $22. DocuSign, which went public back in 2018, closed at an all-time high of $310.05 last September, but now trades below $110 per share.
Investors abandoned both high-growth software stocks amid concerns about their slowing growth, peaking margins, and red ink. The broader rotation away from higher-growth tech stocks exacerbated that sell-off.
But did investors prematurely give up on these two disruptive companies? Let's take a fresh look at both businesses to find out.
Image source: Getty Images.
Disrupting old business routines
UiPath and DocuSign both aim to disrupt old business routines.
UiPath integrates software robots into an organization's infrastructure to automate mass emails, manage inventories, process invoices, enter large amounts of data, onboard customers, and handle other repetitive tasks. These automation tools can help companies eliminate unnecessary job positions, cut costs, save time, and streamline operations. It's currently the world's largest robotic process automation (RPA) company.
DocuSign controls about 70% of the e-signature market and serves most of the Fortune 500's largest financial, healthcare, and technology companies. It also bundles those services with additional contract lifecycle management services in the DocuSign Agreement Cloud. These services can help companies streamline their operations, keep better track of their data, and cut costs by replacing legacy paper-based filing systems.
Slowing growth and lower expectations
Both companies face a similar dilemma: They generated explosive growth in the past, but they're now asking investors to brace for a slowdown.
UiPath's revenue surged 81% in fiscal 2021, which ended in January of the calendar year, and grew 47% to $892.3 million in fiscal 2022. But in fiscal 2023, it expects its revenue to grow just 20%-22%.
It partly attributes that slowdown to the suspension of its business in Russia and currency headwinds, which will together reduce its annual recurring revenue (ARR) by about 3% for the full year. It's also making "prudent assumptions" regarding the scale of its upcoming deals.
DocuSign's revenue rose 49% in fiscal 2021, which also ended in January of the calendar year, and grew 45% to $2.1 billion in fiscal 2022. But in fiscal 2023, it expects its revenue to grow just 17%-18%.
It mainly blames that slowdown on difficult comparisons to the pandemic-induced shift toward remote and hybrid work over the past two years. However, competition from other similar platforms, such as Adobe Sign, could also be pulling away potential customers.
Peaking gross margins
UiPath's adjusted gross margin declined from 90% in fiscal 2021 to 87% in fiscal 2022 as it ramped up its services and cloud hosting investments. It squeezed out a positive adjusted operating margin of 8% in 2022, compared to negative 4% in 2021, as it reined in its other expenses.
But in 2023 it expects its adjusted operating margin to pull back to about 0.5% as it ramps up its spending again. It will also remain deeply unprofitable on a generally accepted accounting principles (GAAP) basis. On the bright side, UiPath generated a non-GAAP net profit of $45.1 million in 2022, compared to a net loss of $3.6 million in 2021.
DocuSign's adjusted gross margin expanded from 79% in fiscal 2021 to 82% in fiscal 2022, but it expects that figure to dip to 79%-81% in 2023. It also expects its adjusted operating margin, which rose eight percentage points to 20% in fiscal 2022, to decline to 16%-18% in fiscal 2023.
It attributes that contraction on its expansion into lower-margin overseas markets as well as its new investments in the Agreement Cloud. The company is also unprofitable by GAAP measures, but its non-GAAP net income more than doubled to $410.9 million in fiscal 2022.
The valuations and verdict
UiPath trades at ten times this year's sales, while DocuSign trades at nine times this year's sales. Both stocks look much more reasonably valued than they did last year, but DocuSign is the better buy right now, for three reasons.
First, DocuSign's core e-signature market is larger and less speculative than UiPath's niche market for RPA applications. Second, its operating margins look healthier, and its non-GAAP profits are much higher. Lastly, DocuSign's CEO made some big insider purchases earlier this year -- but UiPath's insiders haven't bought any shares over the past three months.
UiPath isn't doomed, but it probably won't impress investors again until its growth accelerates and its gross margins expand again.
