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UiPath (NYSE: PATH) is one of the top 10 properties of Cathie Wood. However, since the company’s IPO — about a year ago — PATH has dropped -80%. Is now the time to be a consumer?
I started my coverage on PATH using a Hold/underweight recommendation and a target price of $ 14.39. My calculation is supported by an outstanding earnings model based on the analyst’s consensus estimates of EPS, a WACC of 9% and a 2028E terminal value growth rate equivalent to nominal GDP growth of 3.25%. Although I believe UiPath has an interesting business model with unique positioning, I feel the company’s appreciation still includes a lot of speculation. In addition, investors should note the slowing macro-economic outlook, rising real yields, and a highly unfavorable market sentiment for asset growth.
UiPath – An Overview
UiPath is a leading enterprise automation software company dedicated to helping customers automate business processes — commonly known as Robotic Process Automation (RPA). The company was founded in 2005 in Romania and has rapidly scaled to become a global player, attracting interest from leading growth investors such as Sequoia, Softbank, and Ark Invest. UiPath has developed a platform for automation, combining robotic process automation (RPA) solutions with a full range of capabilities in the context of digital transformation. Daniel Dines, CEO of UiPath describes the company very simply and to the point:
Bill Gates used to talk to Microsoft about a computer in every home. I want a robot for every person. “
The benefits of RPA, which aims to eliminate the need for employees to perform low-cost manual tasks and free up time to focus on more meaningful, strategic tasks can have many benefits for businesses, including: 1) increased professional fulfillment and job satisfaction, 2) enhanced creativity and innovation, 3), increased productivity, and 4) more collaboration and human interaction.
In early 2022, UiPath will have more than 10.000 customers, generating an ARR of approximately $ 1 billion. UiPath defines ARR as “annual invoiced amount per solution SKU from subscription licenses and maintenance obligations assuming no increase or decrease in subscriptionsThe company has established partnerships with leading cloud software companies such as Amazon Web Services, SAP, Microsoft, ServiceNow, Tableau.
UiPath Investor Presentation
market opportunities
UiPath operates in a dynamic and fast growing industry. The market for intelligent Process Automation is currently estimated to be worth approximately $ 20 billion and is expected to grow at a CAGR of more than 15% over the next 3 years to reach $ 30 billion by 2025. And growth is likely to continue. well into the 2030s. In fact, UiPath management estimates the total addressable market for RPA to triple by 2030, reaching a market size of $ 60 billion. The International Data Corporation, or IDC, confirms these estimates, while Bain & Company’s research report is stronger on the RPA market: estimating the market size in 2030 to be between $ 65 billion and $ 80 billion. Market size is supported by strong structural force. Forrester, a global research firm, estimated that there would be 1.69 billion knowledgeable workers worldwide in February 2021. Personally, I believe that in the coming decade, every company will use RPA in one form or another.
UiPath Investor Presentation
There are currently 4 major competitors in the RPA space with a focus on process mining, process discovery, and low -cost code generation tools: UiPath, Microsoft, Automation Anywhere, and Blue Prism. Forrester named UiPath as the current market leader according to a ranking of three categories: Current Offer, Strategy, and Market Presence.
Latest Business Development
The previous FY was relatively successful for UiPath. Topline revenues increased 47% annually to a total of $ 892.3 million. In addition, the company added net new ARR of $ 344.8 million, up 51% year-on-year. Profitability, however, showed mixed results. While the GAAP gross margin remains strong at 81%, the company’s adjusted free cash flow is negative -$ 21.5 million. Looking at UiPath’s financial statements, the company’s Research & Development accounting caught my attention: In the past FY, UiPath spent $ 64.4 million on R&D — less than 10% as revenue share, which I think very low for a company with high growth in the software/tech industry.
The balance is healthy: In early 2022, UiPath had $ 1.87 billion in cash and $ 49.84 million in debt, giving a net cash position of $ 1.82 billion or $ 3.33 per share.
UiPath Investor Presentation
The Outlook for FY2023 was announced to be less bullish than expected:
- Revenue ranged from $ 1,075 million to $ 1,085 million
- ARR in the range of $ 1,200 million to $ 1,210 million as of January 31, 2023
- Non-GAAP operating income in the range of $ 0 to $ 10 million
While we should acknowledge macro-economic headwinds including rising real yields (1), China Covid lockdowns (2) and slowing consumer demand (3), I consider the growth forecast to be 13% year-over-year. for such asset growth as The UiPath is highly frustrating. This soft outlook, combined with the low level of investment in R&D, makes me doubt that UiPath is a high-growth company (the statement is open for discussion; would like to communicate your thoughts to those) comment).
PATH Stock Analysis
I value UiPath using the Residual Earnings framework (RE). I prefer to use RE valuation in the DCF framework, as I consider RE to be more reliable for loss-writing growth assets with large cash-outflows for investment. For my valuation model, please note the following assumptions:
- Because my own insights into business basics may be biased, I decided to base my EPS estimates on analyst consensus forecasts-based on more than 10 analysts.
- I use the CAPM model to calculate the amount of equity and as a second step the WACC (9%) is obtained according to the leverage of the business.
- Regarding the terminal growth rate, I think growth equal to the estimated nominal long-term GDP growth (3.25%) is sufficient as a base-case scenario.
My calculation returns a fair price per share of $ 14.39, indicating an overvaluation of approximately 16% from current levels.
Source: Analyst Consensus, Author Calculations
However, investors should acknowledge that there is considerable uncertainty in a company’s growth forecast for many years into the future. So, let’s consider different scenarios, based on different assumptions. Attached you will find a sensitivity analysis based on different combinations of TV growth and WACC. (For reference: red scenarios indicate overvaluation, green scenarios are undervaluation). Feel free to choose the scenario that you think is most appropriate.
Source: Analyst Consensus, Author Calculations
Finally, based on a 9% WACC, I reverse-engineered the implied growth rate that UiPath would need to achieve after FY 2028 to justify the current share price and obtained an implied growth rate of the terminal 4.39 %, which is approximately 1 % above the estimated GDP growth. Is this a reasonably long-term growth prospect for UiPath? for sure. However, this is not a speculation that I will pay, as the Revenue and EPS run-rate until 2028 is already based on a perfect growth execution.
Risks/Catalysts
I see some associated investment risks that I would like to highlight: First, UiPath has a history of losing operations. There is no guarantee that the company will achieve significant profitability in the coming years, just in case. Second, competition is likely to intensify as large tech companies such as Microsoft (e.g., Power Automate) aim to increase their market share in automation software. Can UiPath compete with Microsoft’s human capital, distribution network, balance sheet and R&D spending? Third, with rising riel yields the growth of assets has experienced strong selling pressure. Although PATH stock has dropped significantly (-80%) since the IPO in April 2021, there is still a lot of speculation built up on the current valuation. The selling party may not be over yet.
As a potential upside catalyst, I see three main factors: stronger revenue growth in the top line than expected, likely due to a strengthening macro-economic outlook; the value of human capital is increasingly rising (see inflation), accelerating the evolution towards fully automated business, and sentiment towards asset growth is improving.
Conclusion
Generally, when something is -80% from ATH, I want to be a consumer. UiPath’s valuation, however, was so inflated in early 2021 that even at current levels the risk/reward for buying the stock doesn’t seem to be in my favor. To justify PATH’s current share price, UiPath management will need to deliver perfect execution in the early 2030s. For me, this speculation is too far-fetched. Additionally, after the latest sale the market may have better bargains to shop (Roblox, Coinbase, Meta and Warner Media Discovery are my favorites). That said, I calculate a base-case fair value per share of the PATH of $ 14.39/share. If the stock falls below this level, I am probably a buyer. However, at this point, I will wait.