UiPath: I Know It’s Bad, But So Do You (NYSE:PATH)

Investment Thesis

UiPath (NYSE:PATH) is another business in my investment list that I call ”High Growth Stocks. And Now Without the Growth”. Another example of this includes Netflix (NFLX).

There’s no question in anyone’s mind that UiPath’s days of growing at +30% CAGR are now in the rearview mirror. That being said, this is now a ”known known” and well factored into its share price.

Furthermore, looking ahead to 2023, not only are investor expectations low, but the comparisons with fiscal 2022 become significantly easier with each passing quarter.

In sum, I believe that bears have been in control of this name for too long. Consequently, I now upwardly revise my rating to a buy.

A High Growth Stock, But Now Without The Growth

As noted in the introduction, there are many companies that are having to rethink and reshape their businesses. UiPath is one such business that I believe will have to make some serious amends as it reconfigures its business.

If for no other reason than simply due to its high stock-based compensation package.

As you can see above, PATH states that it will be diluting shareholders by 5% annually.

So, unless UiPath can consistently grow its revenues by more than 5% annually, investors will get less value back than the intrinsic growth of the business.

Put simply, management is not blind to the share price performance and is well aware of investor concerns.

The Next Amazon?

Investors are keen to buy into secular growth companies, but at the same time, there’s a keen sense of needing to make sure that there’s an actual business under the hood.

The good times when an alluring narrative with a few buzzwords, aided by 0% interest rates, have now come and gone.

Presently, investors are impatient and super demanding. As you know, UiPath has seen its stock fall 80% since its IPO, but it’s far from the only stock that is down more than 75% in the past 18 months. There are plenty of comparable business opportunities, that are also unjustifiably marked down.

For their part, the bulls proclaim that this is a rerun of the dotcom bust, where the likes of Amazon (AMZN) came out from those ashes. While the bears argue that for every Amazon that came out of the rubble, there are at least 10 names that we’ve never heard from again.

Next, further complicating the bull case here is that Microsoft (MSFT) is also eager to take market share in Robotic Process Automation.

My point is this, there are a lot of reasons why the stock is down. But this isn’t where the story ends. Let’s get to the core of the investment thesis.

Path to Profitability?

UiPath’s fiscal Q4 2023 profitability points to $35 million of non-GAAP operating income. With that in mind, we should expect $40 million of non-GAAP operating income, given that management would most likely be lowballing its guidance.

What this means in practical terms is that on a y/y comparison, UiPath’s Q4 2023 would be largely flat with the same period a year ago.

That being said, consider the table below that shows UiPath’s revenue results compared with analysts’ expectations.

UiPath is not the sort of company that has a long history of lowballing estimates and then positively surprising investors. Accordingly, I believe that approximately $40 million of non-GAAP operating income is what investors should brace themselves for.

We might therefore conclude from this guidance that UiPath’s road to greater profitability is unimpressive and that the company isn’t generating much top-line growth.

But is it All Bad?

Nope, I don’t believe it is. Here’s the reality of this investment.

Yes, UiPath was clearly ahead of its potential when it IPOed. Not only was the company reporting very elevated revenge growth rates as it over-earned, plus interest rates were low that it allowed many companies to invest in their capex requirements and seek out productivity gains.

Now, fast forward to today, and interest rates are materially higher. Furthermore, the impact of this slowing economy has already meaningfully factored into UiPath’s prospects.

Thus, this is my core argument. UiPath is well-positioned for a large secular growth opportunity. The only problem was that investors got too excited. But today the same can not be said about UiPath.

As you can see here PATH’s valuation multiple has fully compressed. Anyone that wanted out of the business has by now sold out and moved on.

The shareholders that remain holding this stock are not likely to be mass-sellers at this point.

And that’s a much better position for someone to revisit this name, once all the enthusiasm is out of the stock.

The Bottom Line

There are two negative points and one positive point facing this investment. The bad news is that UiPath’s revenue growth rates are ephemeral. Also, its profitability profile leaves a lot to be desired.

The good news is that UiPath, unlike many other stocks that are down 80% from its highs, UiPath is not burning through excessive cash flows. Also, with more than $1.5 billion worth of cash and equivalents on its balance sheet this means that it has plenty of runway left to turn around its business.

Finally, I believe that with the stock down so significantly, anyone that wanted out of this name is now out. The shareholders that are left, are unlikely to be ”weak hands”.

In conclusion, I’m tepidly bullish on its prospects.