What happened
Shares of work-automation software company UiPath (PATH 0.26%) went up 30.4% in the first half of 2023, according to data provided by S&P Global Market Intelligence. The S&P 500 was up 15.9% during this time, and UiPath actually dropped below this benchmark after reporting financial results for its fiscal first quarter of 2024. But the company is also seen as one way to invest in the artificial intelligence (AI) trend, which ultimately boosted shares to their market-beating performance.
To clarify, the market was feeling upbeat about UiPath after it reported financial results for its fiscal fourth quarter of 2023. It reported results on March 15, and the stock rallied. Then it reported first-quarter results on May 24 and the stock fell. That might be surprising considering fourth-quarter revenue was only up 7% year over year, whereas first-quarter revenue was up a more robust 18%.
That's a clue for investors. If first-quarter growth was better than fourth-quarter growth but the stock fell, then clearly the market is concerned with something other than revenue growth.
So what
From a business perspective, investors aren't as concerned with UiPath's headline revenue numbers as much as they're concerned with growth in recurring revenue. As a subscription business, investors monitor how much net new annual recurring revenue (ARR) is added every quarter.
In the fourth quarter, UiPath added almost $94 million in net new ARR, whereas it only added $45 million in the first quarter. And for the remainder of fiscal 2024, management expects to cumulatively add $183 million at most, which works out to $61 million per quarter -- below its rate in fiscal 2023.
When investors look at these numbers, they worry that UiPath's business isn't growing fast enough. But when they think about the potential of AI, optimism prevails once more.
Given the business dynamics, I believe excitement about AI was the true driver of the stock price during the first half of the year. For evidence, let's compare returns for UiPath stock and the S&P 500 side by side with an AI exchange-traded fund (ETF) called Global X Robotics & Artificial Intelligence ETF. As the chart shows, results for UiPath more closely track with this AI ETF than with the market in general.
PATH total return level data by YCharts.
Now what
UiPath's focus on AI isn't new; it's been the company's mantra since going public in 2021. The difference is that the market is more excited about AI now than back then. And that's always good reason for investors to be cautious. Excitement is driving returns right now, but those emotions can change on a dime.
That said, there is plenty to like about UiPath stock right now. The company has a huge cash position of $1.8 billion and is free-cash-flow positive. This gives it flexibility when waiting out the general slowdown in enterprise software spending.
Moreover, UiPath is a recognized leader in robotic process automation, which should lead to it being a top-of-mind software provider if companies start spending more heavily on software again.
