Is It Too Late to Buy UiPath Stock?

UiPath's (PATH 0.26%) stock surged 13% during after-hours trading on Nov. 30 after the automation software provider posted its latest earnings report. For the third quarter of fiscal 2024, which ended on Oct. 31, its revenue rose 24% year over year to $326 million and topped analysts' expectations by $10 million. Its adjusted net income jumped 159% to $69 million, or $0.12 per share, and beat the consensus forecast by a nickel.

Those growth rates indicate UiPath is finally recovering from its slowdown over the past three years, but its stock has already risen 90% over the past 12 months in anticipation of that recovery. Is it too late to hop aboard the bullish bandwagon?

Image source: Getty Images.

Why did UiPath's growth cool off?

UiPath's robotic process automation (RPA) tools can be plugged into an organization's existing software to automate repetitive tasks like entering data, managing inventories, processing invoices, and onboarding customers. UiPath's first-mover's advantage enabled it to dominate 35.8% of the global RPA market, according to Gartner, while none of its top competitors -- including Automation Anywhere, SS&C Blue Prism, and Microsoft -- hold shares of more than 10%.

The RPA market could still expand at a compound annual growth rate (CAGR) of 40% from 2023 to 2030, according to Grand View Research, as more companies streamline their businesses and replace their human workers with software robots.

UiPath went public in April 2021, and its stock initially soared as it impressed investors with its 81% revenue growth in fiscal 2021 (which ended in January 2021). It grew rapidly as the COVID-19 pandemic forced companies to automate more tasks and accelerate their digital transformations. Its revenue rose another 47% in fiscal 2022 even as those tailwinds dissipated.

But in fiscal 2023, UiPath's revenue only grew 19% as inflation, rising interest rates, and geopolitical conflicts forced many companies to rein in their spending. That slowdown coincided with the rise of ChatGPT and other generative AI platforms -- which the bears claimed would eventually render RPA tools obsolete.

Why is UiPath's growth accelerating again?

UiPath's future looked bleak at the end of fiscal 2023, but its revenue growth accelerated again in the first three quarters of fiscal 2024 as its gross margins held steady. Its dollar-based net retention rate, which gauges its year-over-year growth per existing customer, also stabilized sequentially in the second and third quarters.

Data source: UiPath. YOY = Year over year.

It attributed that acceleration to its growth across the government, financial services, and healthcare markets, which largely offset the macro-induced softness of its other markets. Its customer growth also offset some of the currency headwinds, which reduced its dollar-based net retention rate by two percentage points in the third quarter.

For the fourth quarter, UiPath expects its revenue to rise 24%-25% year over year. For the full year, it expects 21%-22% growth. That slight acceleration suggests UiPath's high-growth days aren't over yet.

The company also insists the rise of generative AI doesn't necessarily represent an existential threat to the RPA market. Instead, it expects to upgrade its own software robots with generative AI tools to perform more advanced tasks. Analysts expect its revenue to rise 21% in fiscal 2024 and 19% in fiscal 2025.

UiPath's remaining performance obligations (RPO), or the remaining value of its existing contracts that have yet to recognized as revenue, also grew 29% in constant-currency terms in the third quarter and accelerated from its 27% growth in the second quarter. That acceleration indicates there's still a lot of pent-up demand for UiPath's RPA tools.

Its margins are improving, and its stock is reasonably valued

UiPath isn't profitable on a generally accepted accounting principles (GAAP) basis yet, but its GAAP operating margin improved from -40% to -20% between the first nine months of fiscal 2023 and fiscal 2024. On a non-GAAP basis, its operating margin rose from -1% to 14%.

Its operating margins and non-GAAP profitability improved as it laid off 5% of its workforce over the past year and reduced its other expenses. Analysts expect its adjusted EPS to surge 193% in fiscal 2024 and grow another 12% in fiscal 2025.

UiPath's stock might have nearly doubled over the past year, but it still looks reasonably valued at 39 times forward earnings and seven times next year's sales. It also remains about 60% below its IPO price.

Simply put, it's not too late to buy UiPath's stock. Its growth will likely accelerate again as the macro environment improves and the RPA market expands, and it's largely shaken off the meme stock traders who recklessly bid its stock to nosebleed valuations in 2021. It won't revisit its all-time highs anytime soon, but it could still be a worthwhile long-term investment.