Shares of UiPath (PATH 0.77%) recently jumped in response to the company's fiscal fourth-quarter earnings. The enterprise automation business reported results that beat expectations on the top and bottom lines.
In addition to a strong performance during the three months that ended Jan. 31, the company issued forward-looking guidance that was even better than Wall Street's forecast.
UiPath's fiscal fourth quarter was more than encouraging, but investors have already driven the stock about 16% higher since its latest earnings call. Does this stock have more fuel in the tank for patient investors, or is it already overbought? Let's weigh some reasons to buy this artificial intelligence (AI) stock now against reasons to remain cautious.
Reasons to buy UiPath stock now
In a nutshell, UiPath helps office workers who couldn't code their way out of a wet paper bag to effectively automate away repetitive tasks. This frees up time for valuable employees to do more meaningful work or eliminates their role altogether.
UiPath has a leading position in the robotic process automation space, and it looks like it's going to stay that way. One of its larger competitors, C3.ai (AI 0.09%), recently reported sales that stagnated year over year during the three months that ended Jan. 31. UiPath reported sales that grew 7% over the same time frame.
Interest rates that keep rising to tame runaway inflation have been a disaster for most enterprise software companies as cash-strapped businesses trim their budgets. A strong performance during the three months that ended Jan. 31 suggests UiPath's clients can clearly see how its service allows them to do more with less.
Customers who spend more than $100,000 annually rose about 20% over the past year, and the number spending more than $1 million jumped 45% year over year.
Looking ahead, there are countless potential use cases for UiPath's clients and generative AI. To this end, it will expand on its relationship with OpenAI, the company behind ChatGPT. By the end of April, the company expects to release a GPT connector that will allow users of the company's low-code development tools to automatically generate content where needed.
Reasons to remain cautious
UiPath is approaching profitability, but it's still reporting losses on the bottom line. According to generally accepted accounting principles (GAAP), the company lost a frightening $328 million last year.
To address the losses, UiPath is making major adjustments to its sales tactics. Last June, the company announced a 5% staff reduction in order to manage its operating expenses, and the company's Chief Business Officer is leaving in April. The co-CEO it brought on last year, Robert Enslin, will lead the company's new, lower-cost approach to sales.
A record number of clients contributing more than $100,000 in annual revenue suggests Enslin's tactics are working. That said, management still doesn't know when it will be able to report GAAP profits.
On an adjusted basis, the company expects to earn around $120 million in fiscal 2024. This works out to about 9.5% of management's revenue estimate for the year.
A 9.5% non-GAAP profit margin is encouraging, but there's a great deal of optimism already baked into this stock's valuation. Right now, it's trading at 67.5 times management's adjusted earnings estimate for fiscal 2024.
A buy now?
I believe UiPath's leading position in the robotic process automation space will allow the business to eventually grow into its sky-high valuation. That said, investors should understand the stock could get hammered if the company's growth rate slows down for any reason over the next several years. Investors should only buy this stock if they can make it a relatively small part of a well-diversified portfolio.
