Workplace automation company UiPath (PATH -0.38%) recently reported its fiscal 2022 fourth-quarter earnings, for the period ending Jan. 31. Investors punished the stock, sending it to new lows. UiPath burst onto the scene with a hot initial public offering (IPO) in April 2021, a time when the markets were euphoric.
The broader market has been shaky since the summer, and once euphoric markets have turned nervous, selling many growth stocks into the ground. Now down more than 70% from its high near $90, is UiPath just a victim of an irrational market, or are there deeper issues at the heart of the stock's struggles? I'll put the pieces together below.
So why did the stock fall after earnings?
The headline numbers in its 2022 fourth-quarter report didn't seem so bad. Revenue came in ahead of analyst expectations, growing 39% year over year to $290 million. Meanwhile, the company was profitable, posting non-GAAP earnings per share (EPS) of $0.05, again beating analyst estimates. So why did investors panic?
The likely culprit was management's revenue guidance for the upcoming year, which implied that growth would slow. Analysts expected revenue guidance of $1.18 billion, but it fell short at a range of $1.075 billion to $1.085 billion. The guidance implies year-over-year revenue growth of 22% for the year ending Jan. 31, 2023. UiPath grew revenue by 47% in fiscal 2022, so growth is projected to drop significantly.
And that is a red flag to the market: It tells investors something is wrong. Perhaps there's a disruption within the business; maybe it's a signal that the company is maturing, and there isn't as much upside left ahead. The bottom line is that investors hate lagging growth, which is probably why the market has punished the stock so harshly.
Some key numbers are still strong
Finding context, the fine print in any situation is always helpful, especially in investing. In UiPath's case, we can see some explanation for the slowdown in growth.
UiPath's software automates repetitive tasks, which can potentially be disrupted by an unpredictable work environment. The company has paused business in Russia due to the ongoing war between Russia and Ukraine. Management is modeling a $15 million hit to fiscal 2023 revenue from this, as well as another $30 million due to currency exchange rates. UiPath prices its products in local currency, so a stronger U.S. dollar makes international revenue less valuable.
These challenges are largely outside of UiPath's control, so I don't think it's fair to hold it against the company. However, investors need to be aware of these new risks. The Europe/Middle East/Africa region is now 29% of the business, down from 34% two years ago. Investors should look for the company to continue making the region a smaller contributor.
I looked at some additional metrics that show the actual business itself is doing quite well to bolster my opinion. For example, total customers grew 28% year over year in the 2022 fourth quarter to 10,100. Large customers (those spending $100,000 or more) grew 49% year over year to 1,493.
The company's net revenue retention rate remained strong at 145%, which signals that customers are increasing their spending on UiPath over time. In other words, it seems that the business is still bringing on a lot of new customers, and they are spending more as time goes on. These seem to me like signs of a healthy and growing company.
The stock's valuation makes UiPath far less risky now
This didn't last, and you can see how the stock's price and valuation plummeted in the chart below. Once valued at a price-to-sales (P/S) ratio of more than 80, the P/S ratio has fallen to just 11. Despite some of its challenges being out of its control, slowing growth is a turnoff for the market, so I don't think investors should expect shares to come anywhere near their previous valuation.
But I think it's just as fair to argue that the drop in shares makes UiPath far less risky. Other software stocks carry valuations ranging from a P/S ratio of 20 to 60, though many are growing revenue faster than UiPath.
Paying a P/S of 11 seems like a reasonable valuation, a discount for a slower-growing business. UiPath's 20% revenue growth is still nothing to sneeze at and could produce strong investment returns if it just grows at that rate and the valuation stays the same.
Financially, the company burned just $21 million in cash in 2021, so with $1.9 billion on its balance sheet, there's plenty of money to fund growth and keep management from issuing new shares to raise cash.
UiPath can be a good investment if it simply continues to grow between 20% and 25% per year. However, it can be an excellent investment if growth picks up by next year or geopolitical tensions fade. The stock is now pricing in bad news, so any positive surprises could lift shares.