Despite UiPath (PATH 0.26%) having excellent long-term prospects, many on Wall Street disliked the company's tepid revenue forecast for the current quarter that it gave in its first-quarter fiscal 2024 earnings report. As a result, the stock currently has 11.03% of its shares sold short.
Investors engage in a short sale by borrowing shares of a stock and selling them, expecting to repurchase them at a lower price in the future. You can calculate the percentage of shares sold short by dividing the number of shares sold short by the total number of available shares. When the percentage of shares sold short exceeds 10%, some consider it a sign of market bearishness on a stock.
However, if you are a contrarian investor, ignore the market's short-term bearishness and consider buying this stock for the long term at current prices. Here's why.
It's a leader in a great business
UiPath makes robotic process automation (RPA) software, a technology that enables businesses to automate repetitive tasks that humans currently perform. These robots can perform tasks such as deciphering information on a screen, executing specific keystrokes, navigating systems, extracting and identifying data, sending emails or notifications, processing data in spreadsheets or databases, and performing other predetermined actions. There is a growing demand for this type of software.
Polaris Market Research projects the global RPA market to grow from $2.7 billion in 2022 at a compound annual growth rate of 37.9% to $66.08 billion by 2032 -- a vast and rapidly growing market.
There are many reasons for the growing demand for RPA software:
- It can free employees to focus on more strategic work.
- Businesses can improve their efficiency and productivity.
- It can help companies to reduce errors.
- Management can reduce costs.
UIPath will benefit enormously as this market grows, as it is the leading provider of RPA software, producing revenue of $1.1 billion in 2022, approximately 42% of the total market revenue. Gartner also named the company a Magic Quadrant Leader in RPA software for the fourth consecutive year in 2022.
If the business is so great, why is the stock down?
UiPath's revenue growth has fallen off a cliff since its initial public offering in April 2021. In the fourth-quarter fiscal 2023 earnings report, the company's year-over-year quarterly revenue growth sunk to 7%, significantly lower than the company's historical revenue growth rates, typically in the double digits.
PATH Revenue (Quarterly YoY Growth) data by YCharts.
Additionally, that 7% year-over-year quarterly revenue growth rate went below its price-to-sales (P/S) ratio of 7.6 on the day the company released its fourth-quarter report. When a company's growth rate dips below its P/S ratio, it could indicate trouble for the company or its stock price. It could mean the company is losing its competitive edge or experiencing declining demand.
Several issues have harmed UiPath's past sales. The ongoing conflict in Ukraine has led to economic instability and supply chain disruptions, ultimately impacting the demand for its software. The global economic growth slowdown has also affected the need for RPA software. Moreover, the strength of the U.S. dollar compared to other currencies has negatively impacted its revenue growth. Since the company generates revenue in multiple currencies, a strong dollar means it takes more in different currencies to buy the same amount of dollars. Hence, UiPath's revenue in other currencies is worth less when converted to dollars.
Last, competition from other RPA software providers offering different solutions for different company needs and use cases could negatively impact the company's revenue growth by reducing its market share, pricing power, or customer loyalty, forcing the company to invest more in research & development, marketing, or customer service to maintain its competitive edge or differentiate its offerings from its rivals -- hurting profitability.
It benefits from generative artificial intelligence (GenAI)
It should benefit enormously from the proliferation of generative AI (GenAI), a type of artificial intelligence (AI) that can create new content, like text, images, and code. This technology has the potential to revolutionize the way that businesses use RPA. Companies can use GenAI to create new RPA bots for tasks that are usually too difficult to automate. AI alone has limited capabilities, like a brain without a body. But when combined with UiPath's enterprise automation platform, it opens up new use cases for customers.
UiPath is integrating its RPA with large language models (LLMs) like OpenAI and Azure's GPT-4, Falcon via Amazon's SageMaker, and Alphabet's Google Vertex connector supporting PaLM 2. LLMs are a form of GenAI designed to understand and process natural language.
Its new solutions will help businesses automate reading screens and documents, respond to emails, create document summaries, address support inquiries, and more.
Reasons why it is a top pick
UiPath's stock price has failed to rise as much as some other software stocks expected to benefit from GenAI technology. However, investors should eventually recognize it as a top beneficiary of this new technology, and its stock price should rise significantly with that discovery.
Additionally, although UiPath is not profitable, its profitability has improved significantly over the last year due to its cost savings initiatives, as seen in the chart below.
PATH Gross Profit Margin data by YCharts.
Investors buying the stock today anticipate accelerating revenue growth due to an improving economy. And when combined with its cost-saving measures, it could result in a significant increase in margins and stock price in 2024 and 2025.
Risk-tolerant investors should consider picking up a few shares at the current price.
