UiPath: A Hold Based On Demystifying The AI Hype (Rating Downgrade)

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UiPath's stock has risen by over 50% since the introduction of Open AI's ChatGPT and is also overpriced, which could indicate AI hype.The company's profitability grade is strong, but, it is not ...

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19:16 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4685587-uipath-a-hold-based-on-demystifying-the-ai-hype-path-stock><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>UiPath's stock has risen by over 50% since the introduction of Open AI's ChatGPT and is also overpriced, which could indicate AI hype.The company's profitability grade is strong, but, it is not ...</p>\n\n<a href=\"https://seekingalpha.com/article/4685587-uipath-a-hold-based-on-demystifying-the-ai-hype-path-stock\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4097","symbol_name":"系统软件","start_time":0,"source_url":"https://seekingalpha.com/article/4685587-uipath-a-hold-based-on-demystifying-the-ai-hype-path-stock","article_id":"2429316744","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/2022766813/image_2022766813.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2429316744","pubTimestamp":1713957385,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"UiPath's stock has risen by over 50% since the introduction of Open AI's ChatGPT and is also overpriced, which could indicate AI hype.The company's profitability grade is strong, but, it is not 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investors must first wait for its commercialization.With all these talks about artificial intelligence, it is important to demystify the topic, namely distinguishing between Gen AI and traditional flavors of technology like Machine Learning or ML.   JuSun/E+ via Getty Images UiPath Inc. (NYSE:PATH) was trading at around $18.75 at the time of writing and is rated as buy by analysts at Seeking Alpha and Wall Street. After a long streak of losses, the company managed to deliver GAAP operating profits for the fourth quarter of 2024 (Q4) and boasts a strong growth grade as shown below. seekingalpha.com Profitability is also well rated, but operating in a highly competitive market, operating expenses could increase as a result of driving sales. Also, the stock has risen by over 50% since the launch of ChatGPT in November 2022 while the S&P 500 has gained less than 30% during the same period. This suggests AI hype for a stock that is already overpriced as shown in red above. Against such a backdrop, this thesis aims to show that this is not a buy. For this purpose, with all the talks about AI-powered, it is easy to get confused which makes it crucial to realistically assess UiPath's artificial intelligence opportunities by distinguishing between Generative AI (Gen AI) and traditional flavors of technology like Machine Learning or ML. Benefiting from AI-Powered Products First, UiPath is a leading business automation service provider with more than 10K customers worldwide, ranging from independent software developers to large companies operating in different industry verticals. Its platform approach which enables new product features to be added relatively easily and while consuming fewer resources has helped to sustain gross profit margins above the 82% mark since 2020. As for artificial intelligence, the company provides a suite of tools to help automate corporate processes, including an easy-to-use visual workflow designer, and an AI-powered document processing component as part of its automation platform. The aim is to alleviate the routine administrative tasks performed by employees including checking emails, processing invoices, and inserting records into Excel sheets, just to name a few. www.uipath.com Now, with its pioneering status in the field of Robotic Process Automation or RPA, UiPath has been able to increase revenues at a rapid pace as shown in the chart below. There is also its Process Mining tool which includes business intelligence and monitoring features since 2019 through the acquisition of ProcessGold.   ycharts.com Now, with all the buzz around ChatGPT, many CEOs started realizing the importance of artificial intelligence, namely its capacity to increase employee efficiency which eventually translates into better productivity and corporate profitability. Therefore as corporations prioritize AI-based transformation, they adopted more of UiPath’s products and the company was able to upsell to its existing user base. Equally important, it is independently positioned since its automation tools are effective across multiple applications of big consultancies like Deloitte, and EY, and software plays like Microsoft (MSFT), and SAP SE (SAP). Profitability and Competition However, while revenue has been progressing rapidly, operating expenses have also followed suit resulting in an operating loss of $162 million for fiscal year 2024 which ended in January. Now, with the balance sheet holding cash of $1 billion versus debt of only $67 million, this is not a company in immediate danger of running out of money as it also generates operational cash flow with levered FCF margins of 26.4%. Still, despite its leadership role in Intelligent Document Management, it faces competition for business automation and as per a comparison on Gartner, UiPath scores 4.5 out of 5 while SAP scores less. Looking further, there is MuleSoft from Salesforce (CRM) and International Business Machines (IBM). Also, this fragmented market which includes many small players sees the presence of Microsoft with Power Automate. I believe the problem for UiPath is that despite Canalys Research predicting that IT spending will increase by 6% this year, customer spending patterns are changing because of persistently high inflation and elevated interest rates. This implies that to obtain discounts, they are more likely to purchase bundled products from larger companies like IBM or Salesforce which can also offer them other functionalities than just RPA. Thus, to achieve sales targets, UiPath may have to continue spending more on R&D and SG&D as was the case in 2024 compared to 2023 as shown below. seekingalpha.com This means that while revenues are likely to continue growing, profits could increase at a slower pace. Thus for the fiscal year ending in January 2025, analysts expect revenues to increase by 19% while EPS should grow at 7% only. Furthermore, while the management is laser-focused on profitability and the company achieved its first quarter of positive GAAP operating income of $15 million in Q4, it is preferable to wait for sustainable control costs over the long term. This is crucial given that the balance sheet holds $1 billion, the company does stock buybacks, and a potential acquisition meant to boost growth may consume cash. This may prompt the company to tap debt markets while monetary policy remaining tighter for longer implies higher borrowing costs. One more remark about the relatively high SG&A which also includes marketing expenses is that it does not portray a company that is enjoying natural (or organic) demand for its products as is the case with SoundHound AI (SOUN) which was able to launch conversational AI products based on Gen AI only five months after the advent of ChatGPT. UiPath ML-Based Products Could be Impacted by Gen AI Unless Autopilot Delivers Now, everything I have been talking up to now concerning AI about UiPath relates to the traditional flavor of the technology or ML where software algorithms are trained on the customer database for example to determine the sender's sentiment for inbound emails before deciding on the course of action to take. This automated way of dealing with customer feedback has increased ROI for UiPath's customers. www.uipath.com On the other hand, Gen AI is about using chatbots to interact with higher quality data sets which are also based on the context, which approaches the way our mind works. This is different from just trying to decipher the meaning of the data to act on it like UiPath's software robots excel. Now, one of the key application areas of Gen AI is for software development, where researchers at McKinsey predict that the task of coding can be completed two times faster than previously. In this respect, anyone who has interacted with ChatGPT knows how easy it is, especially because it uses natural languages or words we use daily to converse with each other instead of complex code. Thus, by significantly improving the productivity of software developers, Gen AI could present them with an alternative to using UiPath's automation tools. Along the same lines, a fully autonomous AI software engineer has been conceived requiring practically no human intervention. Thus, it faces the risk of seeing fewer software professionals subscribing to UiPath's platform, thereby impacting revenues. This idea that Gen AI could pose a threat to UiPath is also echoed by other analysts who have cautioned about the company facing “potential Gen AI headwinds”, according to Seeking Alpha News. However, instead of adopting a wait-and-see approach, UiPath has introduced Autopilot, an innovation that leverages Gen AI to propose immersive experiences as shown below. In the same way as ChatGPT, Autopilot uses natural language which allows for non-techies to develop workflows and it also comes with productivity improvement features. Noteworthily, at the time of the earnings call on March 13, the three Autopilots developed by UiPath, namely Studio, Test, and Process Mining were either in public or private preview. www.uipath.com Not a Buy Till Progress has Been made on Gen AI Since Autopilot is not yet commercialized, one should not expect any Gen AI-related sales in the short term. In this connection, the product has seen many participants previewing it, but it is better to wait for the company to come up with a pipeline, either in terms of the number of customers showing interest or the dollar value of potential deals before investing. In the same breath, valuations show that its forward price-to-sales multiple is overpriced relative to the IT sector by more than 150%, signifying this is not an opportunity at the moment. On the contrary, a delay in the commercialization of its Autopilot may lead to volatility, given the way AI has driven the share price in the last fifteen months. To this end, I was bullish on the stock in October last year, one week after it announced Autopilot.   seekingalpha.com Subsequently, it did appreciate by around 40% but six months later the stock has come down but is still trading at 18.4% up relative to the $15.96 at the time of publication. This suggests that investors may be getting impatient about the product still in preview mode, but I believe that UiPath wants to position it appropriately so that gains in Autopilot do not come at the expense of the existing product line. Looking across the IT sector, Microsoft has already reached 1 million customers for its Copilot for Security, which allows users to create workflow automation using easy-to-use natural language expressions. Now, UiPath does not compete with the software giant for IT security, but the latter is augmenting its Power Automate workflow creation tool through next-generation AI. This competes with UiPath's business automation products. In this case, given it has no first-mover advantage like SoundHound, UiPath could have to spend more to drive the adoption of its Gen AI products through higher marketing expenses, in an increasingly competitive business automation market.  However, since it can generate cash and keep capital expenses under control and has shown capability to make progress on the profitability front, I consider the stock to be a Hold. Finally, its solution based on ML remains advanced for automation purposes, but, with the advent of interactive chat-based tools for easily working with data also incorporating images, audio, and video, UiPath needs to grow in sophistication. Here, its pioneer status in automation may prove useful to drive adoption for Autopilot.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429316744"}