To The Moon

$UiPath(PATH)$

UiPath offers software for robotic process automation (RPA), which helps automate manual tasks and processes. When the company went public in 2021, it had a market capitalization of $35 billion. However, since then, its value has plummeted by more than 80%, bringing its market cap down to $6.5 billion. With $1.9 billion in cash and investments and no debt, the company's enterprise value is $4.6 billion. Over the past 12 months, revenue reached $1.35 billion, with $248 million in adjusted EBIT and $325 million in free cash flow. However, this free cash flow is entirely offset by stock-based compensation, which amounts to $376 million, leading to negative net income.

RPA involves using software to automate various manual tasks, such as logging into applications, extracting data from documents, moving files, filling out forms, and reading emails. UiPath’s use of AI and machine learning allows businesses to increase productivity, which has supported a growing and sticky customer base.

Fundamental Analysis

Since 2021, the company’s revenue has more than doubled, and it boasts a strong revenue retention rate of 118%. However, UiPath’s stock has been falling to new lows following disappointing first-quarter earnings. While sales were relatively solid, the company reduced its full-year growth forecast to just 10%. Even worse, adjusted operating profit was slashed by more than half, signaling a sharp decline compared to last year.

In December 2024, The company reported revenue of $355 million, a 9% year-over-year increase. More significantly, remaining performance obligations (RPO) surged by 133%, reaching $1.128 billion. When RPO grows faster than revenue, it’s typically a sign that future revenue acceleration is likely, as it indicates that UiPath is signing more new contracts than it is fulfilling existing ones. When a contract is signed, it enters into RPO and eventually converts into revenue as it is delivered.

UiPath also reported an operating loss of $43 million on GAAP (Generally Accepted Accounting Principles), which included $87 million in stock-based compensation. This non-cash expense includes stock options and grants given to employees to incentivize performance. Offering ownership in the company aligns employee interests with those of investors, encouraging them to work towards increasing the stock price. Although stock-based compensation is accounted for in the income statement, it doesn’t involve a cash outflow, which helps the company conserve cash while motivating employees to drive company success.

Risk & Challenges

This is a concern for investors who expect strong growth just to offset the substantial stock-based compensation. UiPath's management cited weak macroeconomic conditions for the reduced guidance but also acknowledged issues with execution. Despite new investments aimed at accelerating growth, the results have been underwhelming. CEO Rob Enin has stepped down, and the company is now being led by co-founder Daniel Denz. Investors are clearly uneasy about leadership changes, but there are broader challenges as well.

RPA software that automates tasks like computer clicks and data entry seems less disruptive compared to advancements in generative AI and modern computing. Even if RPA technology proves valuable, many competing products offering similar features are available from other providers such as Blue Prism, Aion, Assana, Moft, and Salesforce's Einstein AI. Blue Prism, which is owned by SS&C, faces similar challenges, with revenue growth in the low double digits. The emergence of generative AI has led to a race to the bottom, as many companies now have access to the same powerful tools. As a result, the competitive moat around many premium software products, including UiPath’s, is weakening.

Guidance 2025

The major update for UiPath stock investors is that the management team has announced expectations for accelerated free cash flow growth over the next few quarters. This is a positive development for a company that has been recovering from leadership changes that previously disrupted operations. Let's dive into the details driving this increase in cash flow for this innovative automation and AI company. I’d like to thank The Motley Fool for sponsoring this video—visit fool.com/parev for the 10 best stocks to buy now.

According to UiPath's CFO, the company now has approximately 10,790 customers. Given the vast number of businesses in the U.S. alone, this shows the significant market opportunity that still lies ahead for the company’s automation services. Management reports a best-in-class dollar-based gross retention rate of 97%, and a net retention rate for the quarter of 113%. This means that customers who have been with UiPath for over a year are increasing their spending, which is a positive sign. If customers weren’t satisfied with the service, they wouldn’t be spending more, so this indicates that they perceive value in what UiPath offers for the price charged.

In my investment framework, the customer value proposition is critical. A business must provide value to customers because this ensures sustainability. When a company offers real value, customers return, and others are likely to discover the business. This leads to sustained revenue. The key question is whether the company can generate profit by offering this value at a reasonable cost. UiPath seems to be achieving that balance, with a focus on profitability.

Market Sentiment

Additionally, UiPath’s platform will now be standardized across all alliance business units as their strategic AI and automation vendor. This customer is expecting productivity gains of 50% and cost reductions of 40% with AI-powered automation, a compelling customer value proposition. While not all businesses will see these exact improvements, it illustrates the potential benefits that can arise when UiPath's services are implemented effectively.

It's crucial for companies like UiPath, still in the early stages of growth, to generate cash flow. This ensures they don't need to go back to investors for more funds, especially in situations where they might have to ask for money in a desperate position, or in a weak negotiating stance, which could result in a higher cost of capital.

As of October 31st, the company had $1.6 billion in cash and marketable securities, with no debt. This is what I refer to as a "pristine balance sheet." Having over $1.5 billion in cash and no debt places the company in an extremely strong financial position. To make it even stronger, they are generating positive cash flow, and as I'll explain in a bit, they expect cash flow to increase moving forward.

More Company Buy Back

One way they are utilizing this cash is by repurchasing their own stock, which management believes is undervalued. In the most recent quarter, they bought back 13.8 million shares at an average price of around $12 per share. For the fourth quarter, the company is forecasting a non-GAAP operating income of $100 million, and they plan to provide additional guidance for fiscal year 2026 when they report their fourth-quarter results.

It's always a positive sign when a company forecasts future performance. The more information management shares with investors, the better, as it helps reduce uncertainty. When investors can narrow down the potential outcomes, it lowers the overall risk, which in turn increases the price investors are willing to pay for the stock.

Valuation

Finally, here's the exciting news I mentioned earlier: UiPath expects their adjusted free cash flow growth rate to accelerate in fiscal year 2026. This is a great signal, as not only will their free cash flow increase, but the pace of that increase is set to accelerate. From a financial standpoint, UiPath is in an excellent position, and that position is only getting stronger with over $1.5 billion in cash, no debt, positive cash flow, and an expected increase in free cash flow growth.

Conclusion

While UiPath may find ways to succeed, the risks associated with investing in the company seem high. These are my personal opinions, not financial advice, and I currently hold no position in the stock.

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