UiPath's (PATH 0.26%) stock jumped 6% during after-hours trading on Sept. 6 following the company's latest earnings report. For the second quarter of fiscal 2024, which ended on July 31, the automation software company's revenue rose 19% year over year to $287 million and topped analysts' estimates by $5 million. It generated an adjusted net profit of $49 million, compared to a net loss of $11 million a year ago, as its adjusted earnings of $0.09 per share cleared the consensus forecast by $0.06.
UiPath's headline numbers look healthy, but its stock remains nearly 70% below its initial public offering (IPO) price. Let's review the bull and bear cases to see if it's a turnaround play.
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The key facts and figures
UiPath plugs its robotic process automation (RPA) tools into an organization's software to automate repetitive tasks like entering data, processing invoices, managing inventories, onboarding customers, and sending out mass emails.
UiPath's revenue soared 81% in fiscal 2021 (which ended in January 2021) and grew another 47% in fiscal 2022. However, its revenue only rose 19% in fiscal 2023 as the macro headwinds drove companies to rein in their software spending.
That abrupt slowdown -- along with rising interest rates, which cast a harsh light on its frothy valuations and lack of profits -- drove away the bulls. But as the following chart illustrates, UiPath's gross profits continued rising in the second quarter as its revenue grew faster than its total cost of revenue, and it significantly narrowed its operating and net losses on a generally accepted accounting principles (GAAP) basis.
What the bulls will tell you about UiPath
The bulls will note that UiPath expects its revenue to grow 20% to 21% in fiscal 2024, which would represent an acceleration from fiscal 2023. That sunny outlook suggests UiPath's slowdown was caused by cyclical headwinds instead of existential ones, and that it should continue to expand at a healthy clip as the macro environment improves.
Therefore, UiPath could still be a top play on the global RPA market, which Fortune Business Insights estimates will expand at a compound annual growth rate (CAGR) of 23.4% from 2022 to 2029. If UiPath grows its revenue at a CAGR of 20% from fiscal 2023 to fiscal 2030, its annual revenue could more than triple from $1.06 billion to $3.8 billion.
UiPath's margins are also expanding as its revenue growth stabilizes. In the first half of fiscal 2024, its adjusted gross margin rose year over year from 85% to 87% as its adjusted operating margin improved from negative 5% to positive 14%. That expansion suggests it still has pricing power and that its cost-cutting measures are paying off.
As a result, UiPath generated a positive adjusted free cash flow (FCF) of $119 million in the first half of fiscal 2024, compared to a negative adjusted FCF of $77 million in the first half of fiscal 2023. To put that cash to work, UiPath launched a new $500 million buyback plan, which will expire in March 2025 -- implying its own shares are currently undervalued.
With an enterprise value of $7.4 billion, UiPath is only valued at 6 times this year's sales. Salesforce, which is expected to only generate 11% sales growth this year, also trades at 6 times sales.
What the bears will tell you about UiPath
The bears will point out that UiPath's dollar-based net retention rate, which gauges its year-over-year revenue growth per existing customer, has been declining. That key metric came in at 121% in the second quarter of fiscal 2024, compared to 122% in the previous quarter and 132% a year ago.
That decline coincides with intense competition from similar platforms like Microsoft's Power Automate, Salesforce's MuleSoft RPA, and Appian RPA. Microsoft and Salesforce are particularly formidable competitors, since both tech giants can bundle their RPA services with their cloud-based customer relationship management (CRM) services.
UiPath's declining retention rates also coincide with the rise of generative AI platforms like OpenAI's ChatGPT. UiPath insists it can use generative AI algorithms to upgrade its own software robots, but there's also a chance that large companies will simply start automating their own tasks with generative AI tools instead of relying on UiPath.
Lastly, there's a glaring lack of insider interest in UiPath even though it just announced a big buyback plan and is still trading far below its IPO price. Over the past 12 months, its insiders sold more than 12 times as many shares as they bought.
Which argument makes more sense?
UiPath still has a lot to prove, but I believe its strengths outweigh its weaknesses. Its stock is cheap, its near-term outlook is stable, its retention rates suggest it can still keep pace with the broader RPA market, and its first-mover advantage and low enterprise value could make it a compelling takeover target for tech giants like Microsoft or Salesforce.
