UiPath's (PATH 0.37%) stock tumbled 19% following the release of the company's second-quarter earnings report on Sept. 6. The automation software provider's revenue rose 24% year-over-year to $242.2 million, which beat analysts' estimates by $11.5 million. Its adjusted net loss of $11.4 million represented a steep drop from its net profit of $4.2 million a year earlier, but its adjusted net loss of $0.02 per share still cleared the consensus forecast by nine cents.
However, UiPath also provided lower-than-expected guidance for the rest of the year. It expects its revenue to grow just 10% to 11% year-over-year in the third quarter and to increase 12% to 13% for the full year. Analysts had been expecting roughly 22% year-over-year growth for both periods. That would also represent a significant deceleration from its 47% growth in fiscal 2022 (which ended this January) and its 81% growth in fiscal 2021.
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That slowdown is disappointing, but should bargain-hunting investors pick up some shares of UiPath at a 75% discount to its IPO price? Let's review the bear and bull cases for this burnt-out growth stock to decide.
What the bears think about UiPath
The bears believe that UiPath's slowing growth, macroeconomic and competitive challenges, widening GAAP (generally accepted accounting principles) losses, and ongoing dilution make it a weak investment.
UiPath's RPA (robotic process automation) services can be integrated into a company's software infrastructure to perform repetitive tasks like processing invoices, managing inventories, onboarding customers, entering large amounts of data, and sending out mass emails. It's still the leader of this niche market, but it faces competition from similar services like Salesforce's MuleSoft RPA, Appian RPA, AutomationEdge, and Automation Anywhere. Salesforce's growing interest in RPA services is particularly troubling, since it integrates its automation software into its industry-leading cloud-based CRM (customer relationship management) services.
As UiPath faces tougher competition, the macroeconomic headwinds are accelerating and preventing large enterprise customers from aggressively overhauling their operations with RPA services. During the second-quarter conference call, CFO Ashim Gupta acknowledged that UiPath's pipeline will continue to "fluctuate given the choppy macroeconomic environment."
Those headwinds indicate that UiPath's GAAP net losses, which widened from $92.4 million in fiscal 2021 to $525.6 million in fiscal 2022, will remain steep. In the first half of fiscal 2023, its GAAP net loss only narrowed slightly year-over-year from $339.7 million to $242.9 million, while analysts expect it to post a GAAP net loss of $402 million for the full year. All that red ink makes it a risky stock to hold as interest rates continue to rise.
In the first half of fiscal 2023, UiPath's number of weighted-average outstanding shares surged 46% year-over-year. That's because it relies heavily on stock-based compensation -- which consumed 39% of its revenue during that period -- to subsidize its salaries. Yet UiPath's insiders have also been eager to dump those new shares: Over the past 12 months, they sold more than 14 times as many shares are they bought.
What the bulls like about UiPath
UiPath's problems are easy to spot, but the bulls will tell you to focus on its gross margins, its long-term growth potential, its valuation, and its liquidity instead. UiPath's adjusted gross margins have remained in the mid-to-high 80s ever since its IPO last April, even as its adjusted operating margins turned negative again this year. Those stable gross margins indicate its early-mover's advantage in the RPA market still gives it a lot of pricing power.
Looking past the near-term macro headwinds, there's still plenty of long-term growth potential for RPA services as large companies eliminate unnecessary jobs to streamline their operations. That's why Grand View Research still expects the RPA market to grow at a CAGR (compound annual growth rate) of 38.2% from 2022 to 2030. If UiPath merely keeps pace with that impressive long-term growth rate, its stock could still generate multibagger gains by the end of the decade.
UiPath's stock closed at an all-time high of $85.12 last May. At its peak, it was valued at $43.2 billion, a whopping 48 times the sales it would generate in fiscal 2022. Today, it's valued at $7.5 billion, or about 7.5 times the sales it expects to generate in fiscal 2023. It isn't a screaming bargain yet, but its current price-to-sales ratio looks a lot more sustainable over the long term. Salesforce and Appian trade at five and seven times this year's sales, respectively.
Lastly, UiPath also won't go bankrupt anytime soon. It was sitting on $1.72 billion in cash, cash equivalents, and marketable securities at the end of July, and its low debt-to-equity ratio of 0.3 gives it plenty of room to take on more debt.
The weaknesses still outweigh its strengths
UiPath isn't doomed, but it isn't a compelling buy in this unforgiving market for imperfect growth stocks. It's already reined in its expectations for the full year, and its steep losses, ongoing dilution, and insider sales will delay its long-term recovery. Investors should avoid UiPath and stick with more stable tech stocks until it lowers a few of those red flags.
