It's been a rough road for shareholders of UiPath (PATH 0.31%), but it appears the stock has found a bottom and is rallying on the back of a solid earnings update. As of this writing, UiPath stock is up 35% so far in 2023, though it remains down some 80% from all-time highs.
The recent reason for cheer is that UiPath has made rapid progress on profitability in recent months, the main cause for so much investor angst during the bear market. However, a new bull market for this software stock (and some of its peers) could be in the early innings.
Now that UiPath has wrapped up its fiscal 2023 (for the 12 months ended January 2023), has the narrative changed enough to buy its stock?
Slower growth, but a far better profit profile
In the fourth quarter of its fiscal 2023, UiPath saw revenue increase a paltry 7% year over year to $309 million. That was far better than management forecast, though, easily sailing past the outlook for up to $279 million in sales provided just a few months ago. Full-year revenue was up 19% to $1.06 billion. Annualized recurring revenue (ARR, an important metric for subscription software businesses) ended Q4 at $1.2 billion, up 30% from last year.
Clearly, in spite of troubling economic issues and a slowdown in tech spending as a result, UiPath's customers (half of them are in financial services, manufacturing, and government) are still finding its services important. Automation -- that is to say, getting operations more efficient and profitable -- is the name of the game these days, and UiPath's software robots help with just that goal.
But more important than the revenue beat in the last quarter was the company's progress on profitability. Like so many other high-growth software businesses in the bear market, UiPath saw its bottom line suffer. It has made great strides to fix this, though. Net loss under generally accepted accounting principles (GAAP) in Q4 was $27.7 million, an improvement from the steep $63.1 million loss a year earlier. On an adjusted basis, UiPath reported net income of $82.7 million in the quarter, up from adjusted net income of $27.2 million last year.
On a full-year basis, GAAP net losses tallied up to $328 million, and free cash flow was just negative $34 million. The discrepancy between the two was primarily due to employee stock-based compensation, which totaled $370 million on the year (or about 4.6% of the current market capitalization).
A new growth cycle, fueled by automation
For fiscal 2024 (the year that will end next January), UiPath updated its guidance for full-year revenue to be $1.253 billion to $1.258 billion -- implying a year-over increase of 18.5% at the midpoint. ARR is expected to end fiscal 2024 at $1.425 billion to $1.43 billion, also up about 18.5% from fiscal 2023. Both of these revenue figures exceed UiPath's initial 2024 outlook provided last summer by about $70 million.
UiPath's market for enterprise automation certainly appears healthy despite economic challenges. But even better than the improving growth outlook was management's continual effort to increase its own efficiency. Full-year adjusted operating income is predicted to be $120 million, nearly double what it was in fiscal 2023.
The company still has a ways to go before it reaches its long-term adjusted operating profit margin target of at least 20%, but it's nonetheless good progress. And with the world still engulfed in high inflation and a high level of uncertainty, automation looks to be a key driver of economic value in the coming years. UiPath could be well-positioned to keep growing (and profitably) for the foreseeable future.
Is the stock a buy?
I continue to believe UiPath will be a highly volatile stock this year, so my approach to investing in this company remains unchanged from a few months ago. Nibble here and there, or employ a dollar-cost average plan to build up a bigger position over time.
At any rate, the valuation has continued to become more attractive as the bear market goes on and UiPath makes gradual progress. Given that the company has a massive $1.76 billion in cash and short-term investments on hand and zero debt, I think the current enterprise value (EV, market cap minus net cash) of $6.4 billion looks reasonable. The shares currently trade for just over 5 times EV to expected fiscal 2024 sales, and 53 times EV to expected adjusted operating income.
If you're a pure value investor looking for robust profits, UiPath probably still isn't the stock for you. Nevertheless, for growth investors comfortable sitting on this investment for at least a few years, the thesis for owning UiPath has improved considerably in the last couple of quarters. I'm happy to own this one, and will consider adding to my position in the coming weeks.
