Even though the artificial intelligence (AI) boom is in its early days, a handful of technology companies seem to have already become synonymous with it. Big tech firms Microsoft, Alphabet, Amazon, and Nvidia are receiving the lion's share of AI hype, and growth companies such as Palantir or ServiceNow also get high praise.
One company that may be getting left out of the AI discussion is workplace automation software platform provider UiPath (PATH 0.26%). Admittedly, UiPath may not immediately come to mind for investors as a potential AI investment. However, as an avid Cathie Wood follower, I recently noticed that UiPath is now Ark Invest's second-largest holding. It holds 44.3 million shares, making up nearly 6% of Ark's total portfolio.
This was enough to compel me to dig further.
Per its most recent quarterly report, UiPath is experiencing a surge in demand for its products. But what is even better for would-be investors is that so far, no one seems to be noticing, which makes this a no-brainer buying opportunity.
The performance speaks for itself
Data source: UiPath company filings. Image source: The Motley Fool.
The image above is a nice, digestible reflection of UiPath's results for its fiscal 2024 second quarter, which ended July 31. However, as a software-as-a-service (SaaS) business, there are a number of key metrics investors should be aware of that are not featured on traditional financial statements.
SaaS businesses tend to highlight annual recurring revenue (ARR). This is slightly different from the revenue figures reported on the income statement because ARR takes into account parameters such as multiyear contracts or built-in price increases. Although ARR is a non-GAAP measure, it can be equally as important as the figures a company reports in its filings, as it shows how much recurring revenue a business is generating.
Given the lingering effects of the recent period of high inflation and the now-higher borrowing costs everyone faces, businesses of all sizes have been operating under tighter budgets for the last several quarters. And yet in the second quarter, UiPath's ARR grew 25% from a year ago to $1.3 billion. Among the key contributors were a 16% gain in the number of customers providing at least $100,000 in ARR and the 34% pop in customers providing at least $1 million in ARR. To get a sense of how this translates into the image above, note that license revenue grew by 15% while subscription services increased by 28%.
Another important SaaS metric to understand is the net retention ratio, which measures how much revenue a company is bringing in net of any churn. A net retention in excess of 100% is considered ideal, as it means the company is outselling its churn. For Q2, UiPath's net retention was 121%.
While taking a look at financials and key performance indicators is useful, investors may be wondering exactly how UiPath is generating such impressive results. Unlike some of its counterparts, UiPath is not selling large language models to the U.S. military or designing cutting-edge semiconductor chips. Rather, the company's software is rooted in streamlining administrative tasks in customer relationship management or enterprise resource planning portals.
In essence, UiPath's underlying features have AI in their DNA already. For this reason, the company's software can integrate with generative AI applications to help with more complex projects and scenarios. So while UiPath may initially come across as merely providing some sorts of widgets that can save people time at the office, the combination of its technology with OpenAI or other applications is far more powerful.
Image Source: Getty Images.
But what about valuation?
Given the performance of the business, investors might think that UiPath stock would command a premium valuation. The technical term for UiPath's technology is called robotic process automation. Per industry research firm Gartner, UiPath's competitors include Appian, Salesforce.com, SAP, and Microsoft.
Given the range in size of these competitors, I've decided to compare the companies using a price-to-sales multiple. I believe that using another metric such as price to earnings or price to free cash flow would result in too dramatic of a disparity to be useful.
APPN PS Ratio data by YCharts
Investors can see that based on that metric, UiPath is trading at a higher valuation than most of its listed cohorts. The only company it is trailing in the chart above is Microsoft. With that said, the chart below shows another interesting dynamic. UiPath's current sales ratio of 7.8 is nearly 90% below its three-year high. So while the stock is trading at a premium to several of its peers, its sales ratio today pales in comparison to its historical levels.
PATH PS Ratio data by YCharts.
Should you buy the stock?
In my opinion, there seems to be a disconnect between the company's stock price and its operating performance. My suspicion is that tech investors do not view or do not understand that UiPath is emerging as a player in AI. But should the company continue to see surging demand, the market will eventually catch on and see that UiPath is creating its own niche in AI.
For this reason, I think now is a unique opportunity to add to your AI portfolio by including UiPath before a potential run-up in the stock.
