Artificial intelligence (AI) is one of the hottest themes on Wall Street right now. Investors are seemingly throwing mud against the wall and seeing what sticks. Various stocks with any semblance of AI have shot higher over the past few months.
Unfortunately, many of them might not work out over the long term. The internet boom in the early 2000s created a frenzy, but ended in pain for many shareholders of low-quality stocks caught in the hype.
However, enterprise software company UiPath (PATH 0.75%) could flourish. Here is why the stock is worth considering for your portfolio today.
A proven AI solution that is already working
Many investors are excited about what AI can do in the future, but UiPath is operating in the present. It specializes in robotic process automation (RPA) software, with bots emulating human workers to automate repetitive or low-skill tasks.
For example, RPA bots can automate things like transferring files and data or completing forms and reports. A bot doesn't need to clock in or out, doesn't take breaks, and doesn't need benefits.
UiPath's RPA process is relatively simple. Its platform consists of three parts that break down as follows:
- Discovery: Identifying tasks for automation and the steps required.
- Automate: Building a bot to perform the job.
- Operate: Managing and scaling automation across an enterprise.
The company is considered the RPA market leader by Forrester Research. It's done $1.05 billion in revenue over the past four quarters, with 1,785 customers spending at least $100,000 annually. And 229 accounts are spending more than $1 million, which shows how much money there is in automating large enterprises with thousands of employees.
Stellar financials create possibilities
Unlike many technology stocks, UiPath is flush with cash and has good financials. The company's free cash flow over the past four quarters is just negative $33 million and trending up, so investors can reasonably expect positive cash profits.
UiPath had its initial public offering (IPO) in April 2021, arguably the height of the bull market. The company netted a trove of cash thanks to a lofty IPO valuation and now has $1.75 billion in cash with zero debt on the books. That makes for deep pockets to continue investing for growth or to make an acquisition -- perhaps buying a competitor.
Management is guiding for operating profits of $120 million, and analysts believe that could -- under generally accepted accounting principles (GAAP) -- translate to earnings-per-share (EPS) of $0.23, and a forward price-to-earnings ratio (P/E) of 68. Again, the company's profits aren't knocking your socks off, but this is a business on the verge of steady earnings growth. That should bode well for investors as UiPath grows revenue over the coming years.
PATH revenue (TTM) data by YCharts. TTM = trailing 12 months.
Is the stock worth your time today?
The stock doesn't sound cheap at a P/E of 68, but this young company should rapidly grow earnings. Analysts believe UiPath's EPS will increase by an average of 40% annually for the next three to five years.
Assuming that's accurate, the stock's valuation should come down quickly for investors patient enough to wait a few years. Let's put the valuation another way: With a market cap of $9 billion, roughly a fifth of UiPath's value is made up of cash! Compare that to any stock you can think of. Heck, Tesla has just 3.6% of its value in cash, and it's arguably a buy at its current share price.
It's a back-of-the-napkin comparison, but it underlines how beaten-down some of these younger, less established companies have become. Given UiPath's market-leading position and robust financials, it seems like an eventual winner when the broader market rebounds.
