Robotic software start-up UiPath (PATH 2.27%) made its market debut in 2021 to great fanfare. The company was growing its sales at a torrid pace, and its tools that help automate redundant tasks have a lot of potential as organizations look for ways to increase their employee efficiency. But the market has turned against UiPath, and shares have sagged 73% since becoming available for public trading.

That doesn't diminish the company's long-term prospects, though. Business is still expanding at a brisk pace, and UiPath is flush with cash to help it maximize its potential. It's a position that a very young Microsoft (MSFT 2.35%) found itself in during the late 1980s after it had its initial public offering (IPO). Could UiPath turn things around and eventually become a software titan?  

Solutions for a highly competitive labor market

UiPath makes software-based robotics products, a niche within IT called robotic process automation (RPA). Software is a fantastic tool for increasing efficiency in the workplace, and RPA in particular helps with automation of redundant tasks -- things like filling out forms with basic information and collecting and organizing data.

UiPath thinks its total addressable market is worth about $60 billion a year and growing, and researchers like Gartner (IT 2.88%) often name UiPath and privately owned peer Automation Anywhere as the top two players in this space.

It certainly isn't getting to the computing technology party early, like Microsoft did in the 1980s, but UiPath does have an offering that could prove very timely in the next decade. Cloud computing and artificial intelligence are helping many organizations find solutions for a shortage of IT workers, and automation of redundant tasks can free up employee time for other activities.

Though the macroeconomic environment has changed in recent months (the Federal Reserve's tighter monetary policy to try to slow inflation, Russia's war on Ukraine, etc.), CEO Daniel Dines believes longer-term demand for RPA is undiminished.

UiPath is forecasting annualized recurring revenue (ARR) to be at least $1.22 billion by the end of the current fiscal year (ending January 2023), representing an increase of 32% over ARR at the end of January 2022. For the sake of comparison, ARR was up 59% year over year in the final quarter of last year. A slowdown in growth is underway, but aforementioned economic conditions in Europe where UiPath is based are a big reason why.

In addition to its fast growth, UiPath generates gross profit margins in excess of 80%, and had $1.68 billion in cash and short-term investments on its balance sheet and zero debt as of the end of April 2022. UiPath's solutions cater to many different industries, it's growing at a rapid rate, and it has the financial flexibility to adapt and invest in new capabilities over time. This has all the makings of a fantastic software stock, much like Microsoft did in 1986.

The glaring issue for UiPath right now

The world of tech start-ups has changed quite a bit over the decades, and there's one big difference (at least financially) between UiPath now and where Microsoft was early on in its story: profitability. When Microsoft completed its IPO in 1986, it was generating positive net income.  

UiPath, in contrast, generated a net loss of $408 million over the last trailing-12-month period. Free cash flow, which excludes non-cash expenses like amortization of intangible assets and employee stock-based compensation, was negative $110 million.  

This is (at least in part) by design as many tech companies forgo turning a profit to maximize spending on research and development and marketing. However, stocks that generate a loss are out of favor right now given the present state of economic affairs and the Fed's aggressive interest rate hikes (higher rates particularly affect higher-growth companies that expect to start turning a profit later on).

Stock-based compensation paid to employees was $101 million in the first quarter alone, over 40% of revenue. While this is not unusual for a fast-growing tech outfit coming off a recent IPO, it's nonetheless a figure that should moderate quickly to keep the company on a sustainable expansion trajectory.  

Issues like this are being addressed with cost-cutting efforts (UiPath said it was cutting up to 5% of its workforce in late June, not exactly great news for anyone), but it remains to be seen just how profitable UiPath can get.  

The good news is that some of these issues (slowing growth, and an uncertain profit outlook for the next year or two) are now priced into this stock. Shares trade at 10 times trailing-12-month sales, still a premium that anticipates fast growth but not the sky-high valuation the company fetched over a year ago.

UiPath could transform itself into a dominant player in the enterprise software industry, but this story is going to take many years to develop. If you decide to invest, keep any position a very small percentage of your overall portfolio.