UiPath (PATH 0.26%) is undergoing a transformation. The now notable Cathie Wood AI stock (also an Alphabet investment) announced that co-CEO Robert Enslin, brought in to help co-founder and CEO Daniel Dines, will assume sole responsibility as the top executive at the company starting in January. The shake-up will send Dines to the role of chief innovation officer, heading up tech research and product development.
It seems the executive shuffle is already changing UiPath's decision-making. During its Q2 fiscal 2024 earnings update -- the three months ended in July -- UiPath announced a $500 million share buyback plan, a type of return of excess cash to shareholders.
With UiPath now indicating it sees its own stock as a good buy, is it time for investors to start buying again, too?
What's so innovative about share buybacks?
Cathie Wood's Ark Invest is known for investing in innovative and high-growth businesses with big long-term potential. But a share buyback plan? That's not exactly indicative of a fast-moving company. Rather, it's more a sign of a maturing business that has plenty of cash to fund all of its ambitions.
It would seem that an AI company like UiPath, which makes software-based automation products -- think virtual bots that can perform redundant tasks for employees or within a business's workflow, known as robotic process automation (RPA) software -- would be especially trendy in 2023. "Automate" and "save money" are corporate buzzwords and top priorities for all sorts of businesses right now.
Nevertheless, cloud-based software companies including UiPath have indeed been forced to grow up over the last couple of years thanks to the bear market of 2022. With cloud computing now a huge market, it's no longer a grow-at-any-cost land-grab type of situation. Instead, growing sustainably -- that is, growing profitably -- is now of the utmost importance. This shift in focus proved to be timely, given that both economic growth and software budget expansion have slowed in 2023.
UiPath is almost a case in point. Its Q2 revenue grew just 19% year over year to $287 million. By comparison, revenue grew at a 24% rate this time last year, and 40% in Q2 two years ago (calendar year 2021).
As growth has slowed, though, UiPath made progress in achieving GAAP net income, mainly through trimming its workforce and related employee stock-based compensation. And free cash flow, an operating profit metric that excludes non-cash expenses like stock-based comp, is now robustly positive too.
Data by YCharts.
Enslin, the former president of Alphabet's Google Cloud, certainly seems like the right fit to scale up UiPath while boosting profit margins along the way.
So year, about that stock buyback plan again
The takeaway here is that, after right-sizing its expenses and taking a hard look at its growth prospects, Enslin, Dines, and the rest of UiPath's board of directors decided it had plenty of cash to meet its needs. That's not exactly a surprising conclusion. UiPath hauled in just $1.15 billion in sales over the last year, but it had more than $1.8 billion in cash and short-term investments and no debt as of the end of July.
A stock buyback, if fully executed, expresses confidence that UiPath will continue growing at a profitable pace. It's also not as if the company is hurting for money.
Attention should now turn toward an indication of a pickup in growth trajectory next year. Enslin and Dines indicated on the last call that many customers feel a bit better about the state of the global economy, and seem to think an acceleration in the business is in the cards for calendar year 2024. This could be especially so as a new era of AI is upon us. Time will tell.
In the meantime, UiPath could be a decent deal if it continues expanding from its currently small base of free cash flow generation. Shares trade for over 60 times trailing-12-month free cash flow, but just about 35 times Wall Street analysts' estimates for next year's free cash flow.
Over the past year, I haven't sided with Cathie Wood's purchases of UiPath. However, with new management in place focused on delivering a balance of innovative AI growth and profits, perhaps it's finally time to start nibbling on UiPath stock again. This one is now back on my list as a dollar-cost average candidate.
