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UiPath's Path To Higher Stock Price Will Likely Come To Pass

Oct. 05, 2022 12:20 AM ETUiPath Inc. (PATH)30 Comments13 Likes

Summary

- UiPath is not profitable. Growth has stalled. Shares aren't cheap. Momentum is negative. The macroeconomic environment seems detrimental to any prospect of short-term rerating.

- A sell rating on PATH seems like the easiest and safest choice. We argue the contrarian case and rate the stock a strong buy.

- Rebooted management, a solid balance sheet, favorable financials, if you know where to look, and technical product leadership are but a few key parameters used to construct a coherent bull case.

Melpomenem

A deterioration in growth prospects and the lack of profitability, combined with terrible momentum, not to mention a poisonous macro-economic environment that punishes long-duration equities, seem to make the bearish case on UiPath Inc. (NYSE:PATH) that much more compelling. But a number of factors including new management, a solid balance sheet, much more favorable financials than it seems, and technical product leadership, lead us to believe that the stock is a strong buy, not a sell.

Check out the graph below.

Price Chart for UiPath (<a href='https://seekingalpha.com/symbol/PATH' _fcksavedurl='https://seekingalpha.com/symbol/PATH' title='UiPath Inc.'>PATH</a>) Shows Negative Momentum

E*Trade

Since going public in 2021, the stock has lost 82.8% of its value (as of 9/30/2022). Can the share price regain altitude? Not only do we believe it can, but we argue that now is a great time to start accumulating. The bear market is inflicting tremendous pain to unprofitable ventures. But these kinds of bargains won't last, and we're clearly well into the downtrend. Remember that the average length of a bear market for the S&P 500 is 289 days, or just about over 9 months, during which stocks lose 36% on average. The current one started at the beginning of the year; we're past 9 months. (The Nasdaq bear started a couple of weeks earlier.) Once the market turns around, the average bull market runs for 991 days, or 2.7 years, during which stocks gain 114%. We're likely getting closer; the more depressed the outlook right now, the closer we're getting to a major trend reversal.

At First Blush, UiPath Shows Major Negative Trends in Both Top and Bottom Lines

UiPath serves customers in more than 115 countries, including across eastern Europe and Russia. Adverse conditions in the global economy, increasing foreign exchange headwinds, and geopolitical turmoil caused by the Russian military operation in Ukraine, have hampered the firm's ability to grow its business and negatively impacted its financial results.

In (fiscal, not calendar) Q2 2023 UiPath reported its operations hemorrhaged $23.7 million in cash. Non-GAAP adjusted free cash flow was negative $23.3 million. Q2 Revenue of $242.2 million still managed to increase 24 percent year-over-year; it doesn't sound so bad, except that the top line used to grow much faster just a year ago. Q4 '22 shows revenue of $289.7 million increasing 39 percent year-over-year, ARR of $925.3 million up 59 percent, and net new ARR of $106.9 million up 72 percent. Likewise, full year fiscal 2022 shows revenue of $892.3 million up 47 percent year-over-year and Net new ARR of $344.8 million up 51 percent year-over-year.

The statement below gives more perspective. Revenue growth is clearly decelerating. Look no further than the top line, which goes from nearly doubling to increasing 50% to increasing 10% (trailing 12-month).

UiPath Income Statement

Seeking Alpha

UiPath Financials

Seeking Alpha UiPath Financials

The bottom line likewise shows significant stress, as is illustrated above. So does operational cash flow. Both the operating income and earnings from continuing operations (both January 22 and TTM) are deep into negative territory. Clearly, there are red flags. Conservative investors may stay away. Put it another way, Warren Buffett does not own PATH.

Shares Aren't Even That Cheap. Let's Have a Look at Valuation

Seeking Alpha assigns PATH a profitability grade of D+. A net income margin of -43%, a return on common equity of -23%, and a return on total assets of -17% sure fail to impress.

UiPath (<a href='https://seekingalpha.com/symbol/PATH' _fcksavedurl='https://seekingalpha.com/symbol/PATH' title='UiPath Inc.'>PATH</a>) Valuation

Seeking Alpha - Valuation

The list, alas, goes on.

A 'Strong Sell' quant rating adds to poor metrics on the growth, profitability, and valuation fronts, to nail the case.

It must be a Sell.

UiPath (<a href='https://seekingalpha.com/symbol/PATH' _fcksavedurl='https://seekingalpha.com/symbol/PATH' title='UiPath Inc.'>PATH</a>) Quant Rating and Factor Grades

Seeking Alpha

Market Sentiment Reflects the Extent of the Damage Done

No wonder then that momentum is to the downside.

UiPath (Path) Momentum

Seeking Alpha - Momentum

All recent time capsules reflect heavy distribution. The stock has shown continued deterioration and underperformed its sector median by a wide margin during all four time periods referenced. Whoever has been holding PATH over the past few months or years has, alas, incurred steep losses.

Unsurprisingly, insiders aren't buying the stock either. At least so far. Since the company went public, not one insider has committed to buying shares.

Insider Transactions at UiPath (<a href='https://seekingalpha.com/symbol/PATH' _fcksavedurl='https://seekingalpha.com/symbol/PATH' title='UiPath Inc.'>PATH</a>)

Insider Monitor

However, while insider sales were heavy in 2021, it is interesting to note they have rarefied in 2022. Only CFO Ashim Gupta (and to a lesser degree CAO Hitesh Ramani) have sold in any meaningful fashion over the past 6 months. Gupta still owns in excess of 1.3 million shares.

This may very well qualify as a first clue that not everything is lost. We'd expect sustained insider selling if the company were such a disaster.

Likewise, a short percent of float of 8.48% shows PATH shorts are active, but the ratio sure does not come to close to the 20% (and well above) rates commonly found on highly controversial or risky investments.

Shorts Ratios, UiPath (<a href='https://seekingalpha.com/symbol/PATH' _fcksavedurl='https://seekingalpha.com/symbol/PATH' title='UiPath Inc.'>PATH</a>)

ShortSqueeze

Even better, Cathy Wood of the famed ARK family of ETFs keeps adding to her already substantial PATH holdings, and this across several ETFs. PATH constitutes a top 12 holding in, not only the flagship ARK Innovation ETF (ARKK with 4.32% of total portfolio, as of 9/30/22), but also ARK Next Generation Internet (ARKW, 4.02%), ARK Fintech Innovation (ARKF, 5.93%), ARK Autonomous Tech. & Robotics (ARKQ, 6.03%), and PATH even figures in the ARK Space Exploration and Innovation ETF (ARKX) and the ARK Genomic Revolution ETF (ARKG), but unsurprisingly at a lower commitment level (ARKX, 2.75% and ARKG, 1.62%, respectively). What does she see that the market does not (yet)?

Both Vanguard and Sumitomo Mitsui also own more than 5%, and Nikko Asset Management and T. Rowe Price just under 5% of UiPath. Wellington Management and BlackRock own more than 3%.

Institutional Ownership, UiPath (<a href='https://seekingalpha.com/symbol/PATH' _fcksavedurl='https://seekingalpha.com/symbol/PATH' title='UiPath Inc.'>PATH</a>)

Yahoo Finance

Institutional ownership is not particularly high (at around 60%, depending on source considered), but this is a positive. The moment the company turns around, there'll be plenty of buying power to propel the shares higher.

The question remains then and seems all the more intriguing. What does Cathy Wood, other funds, and even, to an extent, insiders (who've mostly sold selling shares), see that most don't?

(Admittedly, co-CEO and co-Founder Daniel Dines, who already owns 20% of shares, may not need to add; good thing too, his interest and shareholders' are well-aligned.)

New Management May Rock the Boat

Never a bad idea to start with the people who steer the boat. As it happens, there is fresh blood.

Co-CEO Robert Enslin joined UiPath in May 2022 from Google Cloud, where he served as President of Cloud Sales, led global field operations, and tripled the size of the sales organization. Enslin also spent 27 years at SAP in various leadership roles across sales and operations including, in his final role, President, Cloud Business Group and Executive Board Member (leading the delivery of SAP’s entire portfolio of cloud applications/services). He sure adds depth to the management bench and looks like a nice counterweight to co-CEO Daniel Dines' perspectives and contributions.

To quote Daniel Dines himself:

Rob brings the right balance of experience and skills to scale our operations, allowing me to focus on our company culture, vision, and product innovation, areas I am passionate about – and that bring considerable value to our employees and customers.

Chief Business Officer Chris Weber (who comes from Microsoft) started at around the same time. He leads global go-to-market strategy and execution, thus guides worldwide sales, services, and the firm's partner organization.

These two executives started work at UiPath nearly six months ago. We should start to see the impact of their leadership soon. Perfect timing to consider the shares. Nothing like fresh blood to help reboot management and turn a ship around.

UiPath Remains the Leader in Robotic Process Automation

To a refreshed management team, add a superior product/technology stack. UiPath remains positioned by Gartner, Inc. as a Leader in the 2022 Gartner® Magic Quadrant™ for Robotic Process Automation research report. UiPath has actually been named a Leader for the fourth year in a row. Gartner positions UiPath as highest for Ability to Execute and furthest for Completeness of Vision.

RPA Product Leadership - UiPath (<a href='https://seekingalpha.com/symbol/PATH' _fcksavedurl='https://seekingalpha.com/symbol/PATH' title='UiPath Inc.'>PATH</a>)

UiPath Website

To quote Co-CEO Robert Enslin:

We believe UiPath will be a leader in automation, artificial intelligence, and machine learning, which all companies will embrace over time. We believe this recognition affirms our position at the leading edge of the market as we help customers navigate the challenges facing companies around the world today. We are dedicated to innovating our automation platform, driving our market segmentation, and delivering world-class customer experiences. Earlier this year, we delivered new features within the UiPath automation platform, including general availability of Automation Cloud Robots, which, in our opinion, continues to widen our Leader position. We now have more than 10,330 customers, and are seeing customers taking advantage of offerings such as UiPath Test Suite to accelerate the time-to-value for new automations, and UiPath Integration Service to combine the power of both UI Automation and API integrations in a single workflow. Our customers and prospects are accelerating their digital transformation initiatives to achieve their business outcomes (...)

The list of technical accomplishments goes on.

The company may compete against large software vendors that offer RPA solutions as part of their suite of products or modules, such as SAP and Microsoft (Power Automate), a number of specialized RPA vendors, such as Automation Anywhere and Blue Prism, and Business Process Management providers, including Appian and Pegasystems. But UiPath has so far been able to fend off competition on the strength of its offerings and overall customer success. It has also built a strong community of close to 2,000 resellers and software partners, and tens of thousands of developers. Add an ecosystem of 300+ apps and the trailblazer no doubt enjoys quite an installed base of both customers and partners.

No wonder UiPath is grabbing rather than losing market share. Per the same 2022 Gartner® Magic Quadrant™ for Robotic Process Automation's Market Share Analysis: Robotic Process Automation, Worldwide, 2021, "[UiPath is the] only vendor to grow its market share in 2021, from 28.5% in 2020 to 34.1% in 2021…."

An improved management team can leverage technical product leadership and a leading edge over its rivals, but still sink if the market overall fails to expand. We indicated earlier that sales growth has been decelerating, a major area of concern.

The Global Robotic Process Automation Market Is Expected to Grow at a Fast Clip

If the aforementioned challenges to the top line are a concern, let's address them next. As it happens, they are likely temporary. The RPA market is expected to expand at a fast clip and the opportunity ahead seems more than promising.

In its report titled “Robotic Process Automation (RPA) Market Share, Size & COVID-19 Impact Analysis, By Deployment, By Operation, By Application, By Industry and Regional Forecasts, 2021-2028," Fortune Business Insight stipulates:

The global robotic process automation market size is expected to grow at a Compound Annual Growth Rate (CAGR) of 25.0% during the forecast period [2021-2028], to Reach USD 7.64 Billion by 2028, from USD 1.29 Billion in 2020. (...) As RPA technology allows quick automation of processes in less time, it is considered one of the finest software to boost work from home and remote location productivity and is expected to boost the market growth during the forecast period.

RPA Market Worldwide Expansion

Fortune Business Insights

The take above, as instructive as it is, only provides us with the beginning of an understanding of RPA's prospects. The total addressable market is much larger. Per Bruce Hogan at SoftwarePundit:

Based on a bottoms-up analysis using revenue data from RPA software vendors and market share data from ETR, we estimate the current total addressable market (TAM) for robotic process automation to be $3.5 billion. This TAM for robotic process automation software can grow to as much as $50 billion by 2030. An aggressive estimate from Forrester predicts that Intelligent Automation (RPA plus artificial intelligence) will release $134 Billion in labor value as early as 2022.

However, reaching a TAM of $50 billion, roughly the same size as CRM software today, will require that RPA software overcomes challenging obstacles. Specifically, this will require RPA software to expand into customers' front offices, and integrate with technologies like AI, ML & process mining to automate more complex processes. In addition, RPA must remain relevant after legacy enterprise software solutions that lack APIs are replaced by software solutions that can interface directly.

RPA Market Prospects

SoftwarePundit

RPA Market Propagation

SoftwarePundit

The slowdown in sales experienced by UiPath is thus not related in any shape or form to the market potential for RPA solutions globally. The firm's top line deceleration is most likely circumstantial, primarily related to macro-economic and geopolitical concerns. The Ukraine conflict may have exacerbated short-term market volatility and the disruption of Russian energy exports may have fueled inflation, but the resulting downtrend in demand may not last much longer.

Per Dirk Hofschire of Fidelity's Asset Allocation Research Team:

Geopolitical crises don't tend to have significant and lasting impacts on global financial markets unless they have a sustained macroeconomic impact on major economies." Russia's economy ranks as the world's 11th largest, according to the International Monetary Fund, at only 1/20th the size of the US and 1/15th the size of China, so while Russia has been battered by sanctions against it by the US and Europe intended to punish it for its actions in Ukraine, it is likely not big enough by itself to affect global markets or economic growth.

This not to say that it's all smooth sailing from here. Per the same team:

But because Russia is also the source of nearly 50% of the energy consumed in Europe—the policy responses from the US and Europe that have disrupted energy and other commodity supplies are raising risks beyond the 2 countries' borders. The issue is particularly significant in Europe. Analyst Cait Dourney says that while Europe's economy is still growing, the outlook for the near future now shows a rising risk of recession.

The implications are clear. There is instability and the prospects of a recession, especially in Europe, are heightened. But the US economy is relatively insulated from the war and related vicissitudes, and Europe's economic winter will eventually recede. Further, the moment the situation relaxes, pent-up demand for RPA is likely to drive a major recovery.

A Different Take on Valuation: UiPath Financials Show Major Rerating Potential

UiPath qualifies as the leading RPA provider worldwide. The firm's long-term value proposition is all the more compelling because, especially in an inflationary world, customers are increasingly likely to face major labor woes, and turn to automation to preserve margins.

As indicated above, despite heavy (but lagging) competition, UiPath's market share has recently increased to 34.1%. Co-CEO Daniel Dines' refocus on product development is likely to help maintain, if not further elevate, this share (to possibly as much as 37-40% within a couple of years). TAM is in the $50 billion range, assuming RPA combines with AI and ML to address all business processes. UiPath thus has a shot at becoming a $20 billion business in seven years. If you apply an EV/ sales valuation ratio of 6.7x, you get close to $140 per share. However aggressive (but certainly not unlikely) this may seem to some, it sure provides us with a better sense for the disconnect that exists between current share price and UiPath's business prospects (and the order of magnitude of the prevalent gap) and is not too difficult to imagine a major rerating of shares to materialize within the next 1-3 years, if not within the next few weeks.

UiPath has a global footprint; while it constitutes a major competitive advantage, it also exposes the business to macroeconomic forces including foreign exchange volatility. After accounting for adverse near-term FX impacts in the $25M range in '22, UiPath still manages to maintain very high gross margins - in the vicinity of 85% (see above for detail).

Now have a look at the consolidated statement of operations below:

UiPath (<a href='https://seekingalpha.com/symbol/PATH' _fcksavedurl='https://seekingalpha.com/symbol/PATH' title='UiPath Inc.'>PATH</a>) Statements of Operations, Q2 '23

UiPath Website, Consolidated Statements of Operations

In the six months ended July 31, gross profit increased just about 33%, but both R&D and general and administrative expenses decreased, while sales and marketing expenses increased a mere 6-7%. UiPath has its roots in Eastern Europe (it was founded in Bucharest, Romania, where it is the largest IT vendor), a lower-wage area, where the company deploys a large operation, and is thus able to maintain good control over labor costs, particularly R&D and G&A. Indeed, R&D expenses and G&A expenses constitute about 28% and 25.5% of revenue, respectively (for the 6 months ended July 31). Best-in-class, fast-growing software outfits typically spend more than 20% of their revenues on R&D and as much as 40% to 50% when trying to expand beyond their core products. UiPath seems to be spending just about the right amount and have a good command over these cost items. Further, the appreciation of the dollar is more likely to impact revenue numbers than cost numbers, as UiPath has a higher proportion of costs coming from the EU than is typical of most rivals. It is thus possible that gross profit will outperform major line-item expenses over the next few years. The valuation call above (based on EV/S, not DCF) may ultimately underestimate share price.

Co-CEO Robert Enslin's focus on repositioning go-to-market dynamics should boost both efficiency and sales (including via pricing). While free cash flow may approach quasi-neutrality over the next couple of quarters (FY 23), it's likely to rerate significantly higher in FY 24, as the firm's investment cycle cools off, and the company reaches a better balance between growth and profitability

To quote CFO Ashim Gupta:

Our go forward priority will be to balance investing for long-term growth while managing the business to consistently expand non-GAAP operating margin and deliver sustainable positive non-GAAP adjusted free cash flow in fiscal year 2024 and beyond.

A blended analysis seems best to capture both growth and profitability dynamics, but assigning a higher weighting to DCF (say, 60-65%) than to EV/sales (40-35%) might push valuation calls higher (given the gross profit/operating expenses leverage and optionality). Once sentiment changes and growth stocks start to outperform again, the rerating of PATH shares may be of quite some magnitude.

Risks Are Primarily Macro, not Micro - All the Better from an Investor's Standpoint

A realistic assessment of risks to our rating surely starts with the unfavorable macro factors mentioned above, clearly out of the firm’s control as clients delay purchase decision-making cycles in particular geographies (i.e., Europe).

Adverse conditions in the global economy and geopolitical turmoil caused by the Russian military operation in Ukraine, have so far hampered the firm's ability to deliver better financial results.

Increasing foreign exchange headwinds constitute another key parameter. During the fiscal year ended January 31, 2022, approximately 53% of revenues and approximately 32% of expenses were denominated in non-U.S. dollar currencies. (This, of course, is a plus when the dollar appreciates and the firm has its headquarters in the U.S.)

Inflation, increasing costs of skilled labor, may constitute another notable challenge.

As indicated above, while the prospects of a recession, specially in Europe, are heightened, the US economy remains relatively insulated from the war, and Europe's economic winter will eventually recede.

Further, the moment the situation relaxes, pent-up demand for RPA is likely to drive a major recovery.

Limited appetite for high-growth and long-duration names is another factor to consider. Rising interests punish cash flow expected way into the future. The further out, the worse. But after losing >80% of their value, seems like the shares are well-discounted and the bulk of the damage is behind us.

Further, a strong balance sheet ($1.6 billion in cash, very reasonable amounts of debt) and recently diminishing cash burn, help weather the storm and likely put a floor under the stock.

The dual class structure of UiPath's common stock has the effect of concentrating voting control with the firm's CEO, Co-Founder, and Chairman, which constrains public shareholders' ability to influence the outcome of key decisions.

Conclusion

UiPath may constitute a significant wealth creation opportunity for long-term investors. The firm qualifies as:

- a market and technology leader gaining market share in an expanding space,

- Endowed with financials much more favorable than it seems at first blush, including a strong balance sheet and some cost advantages.

- Negative momentum and market sentiment have punished the stock, presenting bargain hunters with an opportunity.

Solid appreciation potential exists within the next five years. Bullish investors should start accumulating decisively. The more cautious ones - i.e., those waiting for greater visibility into UiPath's future cash flow and earnings - might want to dollar average.

Editor's Note: This article was submitted as part of Seeking Alpha’s best contrarian investment competition which runs through October 10. With cash prizes and a chance to chat with the CEO, this competition – open to all contributors - is not one you want to miss. Click here to find out more and submit your article today!

This article was written by

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Funanc1al Investing

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Investor, entrepreneur, director. Founder of FUNanc!al, Cl1Q, MLI, Ah! Ah! Entertainment. FUNanc!al (www.funanc1al.com) provides market insight, enriches lives. Interested in a wide range of industries and technologies from biotech (synbio, crispr, mRNA, genomics, etc.) to high-tech (AI, machine learning, web, cloud, mobile, etc.), media & entertainment, fintech, and energy. Specialties include building new ventures (Internet, others), corporate mediation and conflict resolution, venture capital, mergers and acquisitions, turnaround or distressed assets, building new ecosystems and increasing the innovation throughput. Invests in all verticals, long only. Yale and Harvard grad.

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Disclosure: I/we have a beneficial long position in the shares of PATH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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SarahConnor74

11 Oct. 2022, 5:08 PM

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Firstly, I own shares so I am vested into his company. I listened into the last quarter's earning calls and I can say management is hellbent on becoming profitable, sure that its not enough, but its a start to hear management conviction to create shareholder value. The issue most present in my mind in the short term is the Foreign Exchange (FX) rate. The dollar is still very strong and this company operates in a global platform (largest employer in Romania), throw that in there fear of a global recession thus its taking longer for companies to decide to buy their product. Companies are enthusiastic about their product, but there is that hesitancy to spend. What I like is their management (even CEO is flying around Europe to meet with companies for sales pitch), their high client retention ratio, large amount of cash vs very little debt, the fact that companies will eventually sad to say will automate most of what they can due to wage inflation among other factors.

The company guided down during last earnings call thus the share price drop to the 12s, earnings were in line. Then, they recently guided down again thus another drop back to low 12s. My concern is that earnings will be in line again, but they might guide down because in essence very little has changed: dollar is still high and global macro is still the same. However, lots can happen between now and earnings that may improve their guidance and they have been making good strong partnerships with large companies in the US for example. We shall see how earnings go, I will be listening in if I am able. Cheers!

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Funanc1al Investing

11 Oct. 2022, 5:17 PM

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@SarahConnor74 Thanks for sharing this. Ultimately, it'll be a winner. Just have to be patient.

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SarahConnor74

11 Oct. 2022, 6:08 PM

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@Funanc1al Investing Correct.

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antoncretu

06 Oct. 2022, 7:20 AM

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I really don't understand why SA is blocking my comments on this thread (pressing on Publish does nothing)

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rtyfghvbn

11 Oct. 2022, 6:57 PM

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@antoncretu I have no clue, but are you trying to post a website link? Maybe comments with links are immediately blocked? I don't know

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antoncretu

12 Oct. 2022, 7:37 AM

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@rtyfghvbn No, there is a bug (server error) on the Seeking Alpha site on pressing the "Publish" button with something in my text (who knows, some special character maybe, I sent them the screen capture a week ago :))

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KFYY

05 Oct. 2022, 12:01 PM

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In my opinion, PATH will go below $10 per share during the next 6 months. At that point I will start buying. Until then, I do not plan to buy even one share.

I strongly believe PATH will be a fabulous company and in 10 years from now it will be over $300 per share during the next financial bubble.

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Jake Goldi

05 Oct. 2022, 1:44 PM

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@KFYY 100 percent in agreement. if you are short term trader then sure wait a bit for another drop in value. It will likely come in the next round of FED rare hikes. Otherwise, in the long term they will certainly go up and a lot. Good for a long position.

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Aalsalman49

06 Oct. 2022, 5:07 AM

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@KFYY If you "Strongly believe" that PATH will be over $300 and you're not buying because the share price is at let's say 12,13,14 and not below 10. I mean it sounds like you don't really believe in it. If this stock goes to 300 what difference does it make 10 or 13? I cannot understand this logic.

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KFYY

06 Oct. 2022, 5:55 AM

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@Aalsalman49

I am very confident the whole market will go much lower from here. Including Apple and the like.

It is a very big difference between 10 and 13. When PATH reaches $300 you either make 23x or 30x your money. 7x is something.

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Aalsalman49

06 Oct. 2022, 6:00 AM

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@KFYY well, timing the market is very dangerous play. Good luck though.

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Jake Goldi

06 Oct. 2022, 6:12 AM

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@Aalsalman49 i agree with that as well. 10, 12 or 15 is negligible at this point. This is why i suggested that he define whether he is a short or long term investor.

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KFYY

06 Oct. 2022, 6:25 AM

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@Aalsalman49 I do not see the "risk" of a whole market rally right now.

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KFYY

06 Oct. 2022, 6:47 AM

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@Jake Goldi Goldberg why to pay $15 when you are convinced the price will go below $10? Just because of FOMO?

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ZipZ

25 Oct. 2022, 4:25 AM

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@Aalsalman49 I'm not as bullish as him. But I'm waiting for $8 share. Compared to $13 it's 60% difference. Also, if you are confident that we haven't seen a bottom, why buy now? Technically, it is currently in a clear downward Channel.

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Tetragrammaton

05 Oct. 2022, 11:20 AM

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Excellent article! But reading between the lines in the wording of the 2Q earnings report, it seems that PATH is discovering that most large enterprises have their IT operations split between in-house processing and cloud applications. PATH’s very clever software can handle cloud, and can handle mainframe, but can’t always bridge across hybrid. This may be one reason their huge marketing expenditures are yielding disappointing revenues – in 2Q the spent $181 million in marketing to get only $242 in revenues (about 75cents on the dollar). Moreover they may be greatly over-estimating their TAM. I can imagine many situations where the customer finds, or thinks, that PATH’s automatic solutions can’t cover their special needs. I’m impressed with the products, but I won’t be buying the stock until profitability is in sight. By then, I’m expecting to be paying less than $5 for a somewhat diluted stock, and at the present rate of SBC the dilution will, by then, be considerable.

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Funanc1al Investing

06 Oct. 2022, 9:01 AM

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@Tetragrammaton Good points. I've worked with CIO's and IT buyers for years. They'll buy off-the-shelf if the solution's solid and try to avoid any custom development (which is expensive and hard to maintain/integrate) anytime they can. Further, PATH will likely/is probably well on its way to grow a service arm to address some of this. The TAM will actually be larger for it. For several decades, software ran in local environments: companies deployed and managed their own servers and customized their apps. The dominance of SaaS and cloud computing over the past decade has demonstrated the value in having common architectures, resulting in higher efficiency, scalability, and innovation. UiPath will follow the same path. Add ramifications into front office, AI, machine learning, etc. The TAM could ultimately be as high as $200 billion, as implied by UiPath itself (check out their website). A lot of the SBC is already well priced in. As for your expectation that the stock may get to the $5 mark, I'll say this. No one can ever know for sure, but I'm pretty convinced that they'll be in a major bull sooner than most believe. Good luck to you.

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jasmine4657

05 Oct. 2022, 11:14 AM

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PATH product is just joke and they claim it i AI... lol

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sheerace profile picture

sheerace

05 Oct. 2022, 9:25 AM

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Thanks for the analysis, understanding and foresight …PATH is best in space, it’s “path” is the future……

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scorpionblue

05 Oct. 2022, 6:33 AM

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a reboot before even the boot lol

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Jake Goldi

05 Oct. 2022, 6:05 AM

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Thanks for the information. Uipath is a great company with a great future and currently with great valuation due to the down market. I am long and keep adding more shares.

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grok42 profile picture

grok42

05 Oct. 2022, 2:55 AM

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One thing that bothers me about PATH is the ridiculous SBC of $190m for six months per the cash flow statement in the 10Q. Maybe I am misunderstanding things but that seems like extreme greed. Curious as to your view of that.

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Funanc1al Investing

06 Oct. 2022, 9:09 AM

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@grok42 SBC is all over the place now. Wrote an article on Ginkgo recently; same (seekingalpha.com/...) The good thing is some of these firms make sure SBC trickles down to lower-level staff, not just officers of the firm. This creates alignment of interests/expectations between an expanding number of employees and public shareholders. Some of SBC is also well-planned ahead and thus priced in. Good luck.

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grok42 profile picture

grok42

06 Oct. 2022, 1:23 PM

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@Funanc1al Investing The question is when is the SBC so high that it becomes a red flag?

Per SA, PATH spent $515m on SBC in 2021. The current MC is $7.5b. So 2021 SBC is 14.5% of the MC per year, and 2022 will likely be higher.

Us ordinary stock holders got to watch the stock price drop from $80 at 5/24/2021 to $13 today, during which period the management paid themselves $705m in stock becoming incredibly wealthy. The company's net loss over the same period was around $750m by comparison. Remember this is only 1.5 years of time. That $705m in SBC came out of stockholders pockets. Imagine how much the SBC would have been if the stock price had not cratered 83%.

So management gets incredibly wealthy while stockholders lose hugely and the company loses a lot of money. This speaks poorly of management character and shows an serious lack of oversight by the board, in my opinion.

What I think we need to know is:

1. How PATH's SBC compares to industry norms?

2. Over the history of the company what would justify such huge compensation?

3. How much of the stock did management actually keep and how much did they dump (do they truly have any skin in the game or is SBC just a opaque and cash flow light way to overpay themselves)?

4. Are there any other indications of poor management character?

5. If you factor in ongoing huge SBC costs, what impact does it have on financial projections going forward? As has clearly happened so far, SBC has been so huge that it appears to have kept them from showing any profitability despite decent margins.

6. If management keeps up their trends in SBC how bad could it get for shareholders? In other words, SBC rewards management hugely while keeping profits negative and the stock price beaten down? Management wins and stockholders lose.

I am all for paying up for good management. But at first blush the SBC seems eggregious to me and may be a warning sign of other problems not yet visible. Reminds me of the cockroach theorem. If you see one cockroach (eg eggergious SBC), there are usually a lot more not visible.

Having said all the above I am have not done the due diligence on the topic and could have it wrong. Just hoping the answers have already been discovered and thought I would ask.

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Funanc1al Investing

06 Oct. 2022, 2:33 PM

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@grok42 Thanks for this! Quite interesting and most deserving of a point-by-point reply. 1. Check out seekingalpha.com/... for some idea as to how PATH's SBC compares with other industry high-flyers. Definitely on the high-end of the spectrum (as a percentage of revenue). 2. If I'm right (i.e., the bullish case plays out) and the stock goes all the way back up to IPO price and beyond, as I anticipate it will, then you'll get your justification right there. This is prospective, not retrospective, of course (unfortunately). For sure, management and hopefully other staff now have skin in the game. 3. No major insider sales lately (outside of CFO/CAO, and they're rather limited in scope); a good sign. 4. No indication of poor management character (as far as I know - again, a good sign). 5&6. My take is SBC will get discontinued or at least go south in the foreseeable future. (Ginkgo completes its rounds of SBC within 9 months now, for example.) The magnitude of the SBC dilution going forward (if any) will be key, of course. Good luck!

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grok42 profile picture

grok42

06 Oct. 2022, 3:31 PM

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@Funanc1al Investing Appreciate the detailed reply. The article you linked to was very helpful. Liked this quote from the article:

"The focus of investors over the last few years, particularly in growth names, has been squarely rooted in non-GAAP earnings, I am guilty of it myself. We all must remember that just because stock based compensation is non-cash, it is certainly not free. It is a legitimate cost that is expensed and one that frankly is coming directly out of your, the shareholders, pocket in the form of dilution."

The article had a great chart showing SBC as a percent of revenues. For PATH, 2021 revenues were $892m and SBC was $515m, so SBC was 58% of revenues which put them at the very high end. We would not mind it so much if the stock did not drop 83% and the company was not losing so much money and cash despite the high gross margins. Personal opinion is that management should wait to reward themselves until they are actually producing a real profit as that is the objective here. Rewarding themselves for huge losses just seems very greedy to me.

Your reply to point 2 was spot on. PATH has a good product and appears to be outrunning the competition and has seen very strong growth. RPA has a huge TAM, as you so aptly pointed out in the article. It is possible PATH will be able to maintain their high, albeit moderating, revenue growth.

But you have to acknowledge that a $500m to $700m SBC expense hit every year going forward is going to significantly slow down GAAP profitability and slow down the rise in the stock price. That combined with the deceleration in revenue growth makes for material headwinds for the stock price.

Insider ownership is indeed pretty high which is good. Kind of humorous to think management is diluting themselves to a certain degree. Lot of insider sales but small in relationship to how much they own. So I think you are right on that aspect.

It is good to know that there are no other obvious signs of bad character on management's part. That is the aspect that bothered me the most. Have owned several high tech high growth money losing stocks that later blew up as management fobiles were exposed.

Anyway, very nice of you to make a detailed reply. PATH has huge potential, imho, but they really need to change their policies on SBC.

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Funanc1al Investing profile picture

Funanc1al Investing

06 Oct. 2022, 3:57 PM

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@grok42 We're in full agreement. Fully appreciate the feedback and thanks to you, as well. (Where do you see that SBC's gonna hit every year by the way? I couldn't locate the info.)

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K

KFYY

06 Oct. 2022, 4:30 PM

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@grok42

if you believe SBC is outrageous, just do not buy PATH. Let the share price crash.

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FLMike

05 Oct. 2022, 12:32 AM

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Excellent article .. great info .. long PATH ..

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William Rilling profile picture

William Rilling

05 Oct. 2022, 12:30 AM

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Good job analyzing PATH! I know that ELEVANCE ELV, a Major Health Insurer, has purchased this Software but it has not yet been implemented and looks like it will not be until early 2023. Training was scheduled but got pushed back.

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