UiPath's (PATH 1.44%) stock rallied nearly 17% on June 2 after the automation software developer posted its first-quarter fiscal 2023 earnings report. Its revenue rose 32% year over year to $245.1 million, which beat analysts' estimates by $19.7 million.
It reported an adjusted net loss of $17.5 million, compared to an adjusted net profit of $11.7 million a year earlier, but its adjusted net loss of $0.03 per share still bested the consensus forecast by $0.03. On a generally accepted accounting principles (GAAP) basis, its net loss narrowed from $239.7 million to $122.6 million.
UiPath's better-than-expected results were encouraging, but its stock still trades about two-thirds below its April 2021 IPO price of $56. Let's see why UiPath initially crashed, and whether its post-earnings pop can sustain itself.
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Why did UiPath lose its momentum?
UiPath's software "robots" can be embedded into an organization's infrastructure to process invoices, manage inventories, onboard customers, enter data, send out emails, and perform other repetitive tasks. Automating those tasks can help companies eliminate redundant positions, operate more efficiently, and cut costs.
UiPath's early-mover advantage in this niche market turned it into the world's leading robotic process automation (RPA) company. Its basic subscription tiers cost between $420 and $1,930 per month for small businesses, and it provides even pricier options on a case-by-case basis for larger customers.
UiPath's disruptive technology and robust growth rates initially impressed investors. Its revenue surged 126% to $336.2 million in fiscal 2020, which ended in January of that calendar year, and rose 81% to $607.6 million in fiscal 2021. Its revenue grew another 47% to $892.3 million in fiscal 2022.
But for fiscal 2023, UiPath expects its revenue to only rise about 22% to $1.09 billion. It attributed that slowdown to the suspension of its business in Russia, which will reduce its annual recurring revenue (ARR) by about $15 million for the year, as well as currency headwinds from a strong dollar, which will lower its ARR by another $10 million. It also expects macroeconomic headwinds to impact the timing of some large deals.
A high valuation and lots of red ink
Based on that forecast, UiPath still trades at nearly 10 times this year's sales, which makes it a bit pricy relative to other software companies with comparable sales growth. For example, Salesforce expects to generate 20% sales growth this year, but it trades at just six times that estimate.
As UiPath's growth decelerates, its bottom line remains deep in the red. Its GAAP net loss narrowed from $519.9 million in fiscal 2020 to $92.4 million in fiscal 2021, but widened to $525.6 million in fiscal 2022. Analysts expect its GAAP net loss to only decline slightly to $403 million in fiscal 2023.
A huge portion of that loss can be attributed to its stock-based compensation (SBC) expenses, which gobbled up 41% of its revenue in the first quarter of fiscal 2023. As a result, UiPath's total number of weighted-average shares surged 152% year over year during the quarter, which will make it even tougher for its premium valuation to cool off.
To make matters worse, UiPath's gross margin isn't improving. Its non-GAAP gross margin fell from 90% in fiscal 2021 to 87% in fiscal 2022, and slipped to 85% in the first quarter of fiscal 2023. It attributes that ongoing contraction to its cloud infrastructure investments.
Trying to find the silver lining
UiPath's decelerating growth, high valuation, ongoing dilution, and red ink all made it a very unappealing investment as rising interest rates drove investors away from more speculative growth stocks.
But on the bright side, the company still turned in a healthy dollar-based net retention rate of 138% in the first quarter. It also ended the quarter with $1.8 billion in cash, cash equivalents, and marketable securities and no debt -- and it expects its adjusted free cash flow to come in "neutral to slightly positive" for the full year. In other words, UiPath won't go bankrupt anytime soon.
That said, I still don't see a way for UiPath to reclaim its IPO price in the near future. Its technology is intriguing, but its fundamentals are weak and its valuation is too high. Instead of investing in UiPath, investors should buy Salesforce or more stable tech giants to ride out this tough market.
