UiPath's (PATH -0.42%) stock jumped 12% on Dec. 2 after the automation software provider posted its latest quarterly report. For the third quarter of fiscal 2023, which ended on Oct. 31, revenue rose 19% year over year to $263 million and beat analysts' estimates by $7 million. Its adjusted net income surged from $2 million to $27 million, or $0.05 per share, which also cleared the consensus forecast by $0.06.
Does that earnings beat indicate that UiPath has finally reached an inflection point after losing about two-thirds of its value over the past year? Let's see where its stock might be headed over the next 12 months.
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UiPath's growth is still cooling off
UiPath develops robotic process automation (RPA) services that can be integrated into an organization's software infrastructure. These robots perform repetitive tasks like processing invoices, managing inventories, onboarding customers, entering large amounts of data, and sending out mass emails. It's the leader of the global RPA market, which Fortune Business Insights believes will have a compound annual growth rate (CAGR) of 23.4% between 2022 and 2029. That robust growth should be driven by the ongoing replacement of human employees with automated programs.
UiPath's revenue surged 81% in fiscal 2021 (which ended in January 2021) and grew another 47% in fiscal 2022. But this year, it expects its revenue to increase only 15% to $1.03 billion. During UiPath's third-quarter conference call, chief financial officer Ashim Gupta attributed that slowdown to a "choppy macro environment and pressure from foreign exchange."
Those comments aren't surprising, since the macro headwinds have forced many large companies to rein in their software spending over the past year. UiPath also generated 57% of its revenue outside of the United States in fiscal 2022, so a strong dollar has been significantly reducing its international sales.
Also, UiPath faces a growing number of competitors in the RPA space, including Salesforce's MuleSoft RPA, Appian RPA, AutomationEdge, and Automation Anywhere. These four rivals could fragment the niche RPA market just as its growth cools off.
When UiPath's stock closed at an all-time high of $85.12 last May, its enterprise value reached $41.3 billion -- or 46 times the revenue it would generate in fiscal 2022. That bubbly valuation became unsustainable as rising interest rates drove investors away from pricey growth stocks over the past year. But today, UiPath has a more reasonable enterprise value of $4.8 billion -- or four times next year's sales -- which makes it more comparable to blue chip tech stocks like Salesforce.
It's still deeply unprofitable
In the third quarter of fiscal 2023, UiPath turned profitable on a non-GAAP (generally accepted accounting principles) basis, which generously excludes its stock-based compensation and other one-time expenses. However, it still posted a non-GAAP net loss of $2 million in the first nine months of fiscal 2023, compared to a net profit of $18 million a year earlier. On a GAAP basis, its net loss narrowed year over year from $462 million to $301 million during the same period.
That narrower loss is a step in the right direction (after its net loss widened significantly in fiscal 2022), and the company was still holding $1.68 billion in cash, cash equivalents, and marketable securities at the end of the third quarter. Its low debt-to-equity ratio of 0.4 also gives it room to raise fresh cash at reasonable rates.
Unfortunately, UiPath's GAAP losses will likely keep the bulls at bay until interest rates cool off and the macro headwinds subside. UiPath's margins are also still being squeezed: Its non-GAAP gross margin fell by a percentage point year over year to 85% in the first nine months of fiscal 2023, while its non-GAAP operating margin dropped from positive 5% to negative 1%.
And its dollar-based net retention rate slipped 6 percentage points sequentially to 126% in the third quarter. Those weakening numbers all suggest that UiPath could be losing its pricing power in the market that it created.
Where will UiPath's stock be in a year?
Analysts expect UiPath's revenue to rise 14% this year and 19% in fiscal 2024. On a non-GAAP basis, they expect it to post a net loss this year, followed by a slim net profit of $0.06 per share in fiscal 2024. We should take those estimates with a grain of salt, since no one is sure how long the macro malaise will last or if UiPath can stay ahead of tough competitors like Salesforce, which can simply bundle its RPA tools with other software to grow its market share.
I believe that UiPath will keep growing, but that its unstable margins and steep losses will prevent the bulls from coming back. Therefore, I expect the stock to stagnate at these levels and underperform the market over the next 12 months.
