It's been a fantastic 12 months for shareholders of robotic process automation (RPA) specialist UiPath (PATH 0.26%). Though the budding tech stock still trades nearly 70% below its post-IPO (initial public offering) high set in 2021, you can't help but wonder: Is it too late to buy UiPath stock today?
As a shareholder since shortly after that IPO -- and with the caveat that I don't expect it to revisit those highs in the very near future -- there are two big reasons I think so.
UiPath's AI is more than lip service
Part of UiPath's impressive gain over the last year can certainly be credited to Wall Street's euphoria over seemingly any business that claimed to be harnessing the power of artificial intelligence (AI) to benefit its customers. Too many of those businesses were making big, unfounded claims about their respective AI solutions' usefulness and revenue-generating capabilities.
Not so with UiPath. UiPath is an AI company at its core, having worked for nearly two decades to "accelerate human development" using its software robots. Those robots helped enterprise clients do everything from vetting resumes to automating software development and detecting fraud.
In essence, that means focusing on "thinking" tasks or complex use cases that were previously difficult or impossible to automate at scale. A few months ago, the company even expanded its AI capabilities to include a suite of generative AI and specialized AI tools.
As a result, UiPath's value proposition has become so clear that its dollar-based net retention rate (DBNRR) stood at 121% last quarter (or 123%, excluding currency exchange) -- indicating customers spent an average of 21% more on UiPath's platform after their first year as clients. This is despite persistent macroeconomic uncertainty impacting demand and lengthening its sales cycles.
UiPath accomplishes its strong net retention rates through its effective land-and-expand approach. It first lands customers with its core RPA product, saving them money through automation. Then, it helps them identify additional applications to expand their use cases, eventually migrating them to its full RPA platform and driving sticky annual recurring revenue ever higher.
On UiPath's operating leverage
Better yet, UiPath has refused to pursue growth simply for the sake of growth. Rather, management has focused on driving profitable growth through operational efficiency. And its operating leverage appears to be accelerating.
To be clear, UiPath still hasn't reached sustained profitability based on generally accepted accounting principles (GAAP). But it's trending in the right direction, with its GAAP net loss narrowing by more than half in the nine months ended Oct. 31, 2023, to $123.8 million, or $0.22 per share, from a loss of $0.55 per share in the same year-earlier period.
Meanwhile, UiPath simultaneously inflected to positive GAAP operating cash flow of $153.5 million over the first three quarters of the year (from negative $104 million a year earlier). It's also now generating positive adjusted free cash flow (FCF); $163 million in the nine months ended Oct. 31, 2023, again swinging from negative FCF of $101.2 million a year earlier.
UiPath CFO Ashim Gupta reiterated the company's conservative growth strategy in a quarterly statement, writing: "Given the strength of our business model we expect to balance growth and profitability, while investing in the business to position UiPath for long-term success."
What's next for UiPath investors?
So where does that leave UiPath investors today? I think shares are reasonably valued trading at a 11 times sales with its $13.5 billion market cap. Though that multiple has steadily expanded over the past few quarters as UiPath stock's gains have obviously outpaced its sales growth -- and noting the stock has been absolutely hammered since mid-2021 -- the relatively modest premium shareholders are paying today pales in comparison to its steep post-IPO highs.
In the end, I think it's fair price to pay for a high-quality business that's not only generating solid top-line growth with a sticky product, but also poised for significant incremental operating leverage going forward. And UiPath stock should have plenty of room to sustain that growth for years to come as it works to capture as much of its estimated $61 billion total addressable market as possible.
UiPath should be set to release its fiscal fourth-quarter results (for the period ending Jan. 31, 2023) around mid-March. Current guidance calls for quarterly revenue of $381 million to $386 million (up around 24% year over year at the midpoint), with annual recurring revenue ranging from $1.450 billion to $1.455 billion (up from $1.378 billion exiting last quarter and up 20.6% year over year).
