UiPath (PATH -1.56%) is an enterprise technology company specializing in automation software to make businesses more efficient. This was once a Wall Street darling stock. But in 2022, valuations came down and enterprise software stocks were especially hard hit.
Down more than 80% from its all-time high, UiPath stock has largely been left for dead. However, while there are some lingering concerns, this business is performing quite well and may actually be worth buying for investors who are comfortable with buying shares in a still profitless company.
Green flag: The long-term growth narrative is strengthening
For long-term investors, it's challenging to predict how things will be in three, five, or 10 years. And it's especially challenging to predict for software companies like UiPath, where things are prone to fast-paced innovation.
I can't be positive about UiPath's long-term growth potential. But two developments with the business are making the investment thesis stronger and stronger.
First, UiPath is adding customers even during a tough time. On Jan. 31, UiPath concluded its fiscal 2022 with 10,100 customers. As of the third quarter of its fiscal 2023, the company had 10,650 customers. With the possibility of a recession in 2023, businesses are generally tightening their belts and showing a reluctance to spend on new products. But by adding new customers during this time, UiPath is showing resilience.
Moreover, UiPath signs contracts with its customers, which gives it recurring revenue -- another visibility benefit for long-term investors. In Q3, the company generated revenue of $263 million, up a respectable 19% year over year. But annualized recurring revenue was up a much better 36% to over $1.1 billion, which suggests the future is brighter than the present.
Second, contracts are getting longer. UiPath provides investors with information regarding its remaining performance obligations (RPO) -- revenue under contract yet to be recognized. At the end of fiscal 2022, its RPO was at $683 million and 62% was expected to be recognized within one year.
At the end of Q3, UiPath's RPO was at $759 million (up 7% quarter over quarter) and only 58% was expected within one year. In other words, tens of millions of dollars of contracted revenue has shifted to further out than one year, giving shareholders a measure of confidence that the long-term narrative is strengthening.
Red flag: Show me the money!
Despite strong top-line growth, UiPath has cash-flow problems. Through the first three quarters of its fiscal 2023, the company's operating activities have burned through $104 million. For perspective, it's only generated $750 million in revenue during this time.
Moreover, stock-based compensation (shares given to employees, which registers as a non-cash charge) is extremely high for UiPath at $271 million in fiscal 2023 so far. It doesn't contribute to the company's cash burn, but it is a drag on shareholder value all the same.
Is UiPath overcoming its red flag?
Smart investors understand that profitability is a nuanced subject. Cash-burning companies don't make good investments unless they can eventually become cash generative. And companies frequently forgo profits now if it means growing the business to capture higher profits later. The trick is distinguishing the good businesses from the pretenders.
In UiPath's case, it's hard to know what its future cash-flow situation will look like. That said, there are some notable recent improvements. First, through the first three quarters of its fiscal 2023, UiPath's revenue was up 24% from the comparable period of fiscal 2022. However, total operating expenses were down less than 1% during this time. This suggests management is controlling costs better recently.
Moreover, stock-based compensation is high. However, through the first three quarters of fiscal 2023, it was down 38% year over year. That's also trending in the right direction.
PATH Stock Based Compensation (TTM) data by YCharts
Finally, UiPath has a lot of runway. The company has $1.7 billion in cash, cash equivalents, and marketable securities as of Q3 -- substantial for a company with a market capitalization of $7.6 billion.
In summary, UiPath's cash flow is getting better. And its financial cushion gives the company years of runway even burning cash at its current rate. With plenty of time, UiPath management can continue intentionally chipping away at a market opportunity that it believes is worth over $60 billion. And it can expand its products to capture an additional $30 billion in new markets.
Ongoing growth in a tough economic climate, improving cash flow, and strong balance sheet may make UiPath a stock worth buying.
