Shares of artificial intelligence software company UiPath (PATH -0.49%) have been rallying off of lows in recent weeks, driven by better-than-expected third-quarter earnings and a general relief rally in the stock market. Nevertheless, with the stock down over 80% from all-time highs reached in 2021, UiPath has a lot of work to do.

The technology company has been hit hard by the bear market this year along with other early-pandemic darlings. Is the worst now over for UiPath, and is it time to buy now?

An earnings beat provides a glimmer of hope

For its 2023 fiscal third quarter (ended in October), UiPath announced revenue of $262.7 million, a 19% year-over-year increase, easily surpassing management's expectations for as much as $245 million from a few months ago. On an annualized recurring revenue (ARR) basis, revenue was up 36% year over year to $1.11 billion.

UiPath, based in Romania, has been hit especially hard by the bear market. A substantial number of its customers are in Europe, where the war in Ukraine and an ensuing energy crisis have businesses behaving extremely cautiously. Additionally, the U.S. dollar's value is on a record run due to the Federal Reserve's record interest rate hikes to try and get inflation under control. A stronger dollar lowers the value of UiPath's international sales. Excluding currency exchange headwinds, ARR would have been up 38%. 

In spite of a myriad of challenges, UiPath's library of robotic software solutions remains in demand among new and existing customers. Dollar-based net retention rate was 126% in Q3, implying that existing users spent 26% more with UiPath than last year. And total customer count was 10,650 at the end of the quarter compared to 9,630 a year ago.

All of this added up to an increase in 2023 full-fiscal-year guidance. Q4 revenue is expected to rise sequentially to at least $277 million. And full-year ARR is now expected to be at least $1.174 billion (versus $1.158 billion previously). Not bad at all.

A few concerns still linger

Before getting back on the UiPath wagon, there are a few issues to bear in mind. First, though the company is making great progress working toward profitability, robust profits remain elusive by most metrics.

Profit Metric

Q3 Fiscal 2023

Q3 Fiscal 2022

Net income (loss)

($57.7 million)

($123 million)

Adjusted net income (loss)

$26.7 million

$2.1 million

Free cash flow

($24.1 million)

($7.7 million)

Data source: UiPath.

Without much in the way of meaningful net income, the market will likely continue to keep a skeptical eye on UiPath. Unfortunately, that's the sentiment we're dealing with these days, regardless of how promising this company's robotic software solutions are. Given the present bear market, I can't say UiPath is a top stock to buy on my list.

Nevertheless, if the company continues to make progress on its profit margins and can accelerate its growth once the economic storm clouds start to clear, this could be a long-term value. On an adjusted basis, UiPath has generated $0.05 per share over the last year. Companies like this that are beginning to turn the corner from loss- to profit-generating operations can put up some dramatic earnings increases. If the company can double its earnings in each of the next two years, shares could be undervalued right now.

At any rate, UiPath will first need to prove it's able to continue its expansion and get itself profitable. A recession is possible in 2023, making that task all the more difficult. The company isn't out of the woods yet. It's possible UiPath stock could sink back toward all-time lows again. However, if you are looking at the potential far down the road, it might be worth nibbling a little on this stock after it's been crushed in 2022.