UiPath: Torn Between Valuation And AI Growth Acceleration

seekingalpha05-28

UiPath is an enterprise software company that builds software robots to drive productivity (not software for robots).RPA (robotic process automation) may get a boost from AI implementation that ...

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href=https://seekingalpha.com/article/4695992-uipath-torn-between-valuation-and-ai-growth-acceleration><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>UiPath is an enterprise software company that builds software robots to drive productivity (not software for robots).RPA (robotic process automation) may get a boost from AI implementation that ...</p>\n\n<a href=\"https://seekingalpha.com/article/4695992-uipath-torn-between-valuation-and-ai-growth-acceleration\">Source 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NicoElNino/iStock via Getty ImagesIntroduction About two years ago when I became more aware of the global population decline estimates and the impact on society, especially in the developing world, I thought that robotics and automation would be a mega trend and searched for companies/ETFs that can benefit from replacing human work. One of the companies I invested in was UiPath (NYSE:PATH) a robotic process automation (RPA) software developer, which I saw as a top holding in the Global X Robotics & Artificial Intelligence ETF (BOTZ) and ARK Autonomous Technology & Robotics ETF (ARKQ). What is UiPath The company is a software developer of Robotic Process Automation or RPA. It does not develop software to run robots. RPA is software that automates everyday processes that require routine time-consuming human action that is prevalent in many business functions in accounting, customer service, and human resources. Where you find data-intensive rules-based and repetitive processes, RPA can cut time, costs, and error. UiPath is an enterprise software company that builds software robots to drive productivity. The company sells RPA via subscription licenses and generates recurring revenue that the market measures via an Annualized Renewal Rate (ARR). The primary cost is human capital and the infrastructure to deliver and sell its services which are highly scalable, i.e., there is a high percentage of fixed costs that result in margin expansion with added revenue/customer growth. PWCCEERPA Market The market for RPA is estimated to grow at 20% a year with a total addressable market of US$14bn to US$50bn according to Fortune Business and 360 Market Updates. The introduction of Generative AI should accelerate and perhaps increase RPA demand, according to the information I have seen the technologies are highly complementary. However, this is a competitive market with more than 30 companies offering RPA which may mean a low barrier to entry. While UiPath seems to be a market leader it does have some deep-pocketed competition in the likes of Microsoft (MSFT), IBM (IBM), and SAP (SAP). While one could view this as a threat it may also mean that PATH is an M&A target.   UiPAthPeer Comps In the table below are consensus data for a few of the listed RPA players and as can be seen the market estimates high price targets and a relatively low valuation with a PEG of 1.1x. PATH has the best revenue growth estimate while Appian (APPN) is the only one with negative margins. I did not add the big caps given the irrelevance RPA is for their overall business.   Created by author with data from Technology MagazineCreated by author with data from Capital IQPerformance PATH has lost 73% of its value since its IPO in April 2021 and is the worst-performing among the peer group. NICE (NICE) and SS&C Tech (SSNC) fared better. The stock was placed at a massively overvalued valuation while rates were zero and then nosedived on the Fed hiking cycle. Forward gains may get a tailwind with eventual rate cuts but ultimately depend on growth execution in my view.   Created by author with data from Capital IQConsensus Financials Judging from consensus estimates the market believes PATH can keep pace with the RPA growth trend and continue to gain scale. The consensus of 19 analysts estimates the company has revenue growth of around 19% in the next two years which should boost EBITDA margins by 200 basis points to 22% while cash earnings margin (that adjusts for stock-based compensation) rises less to 23% in the calendar year 2025. It is not until 2026 that estimates lead to positive GAAP Net Income and an 80% increase in cash earnings.   Created by author with data from Capital IQConsensus (Created by author with data from Capital IQ)Cash Flow Estimates The company, as with many tech firms, utilizes stock-based compensation (SBC) to keep and reward key employees. This is a largely non-cash item as the reward has a long vesting time frame and results in lower share dilution than the immediate reward. In addition, many tech companies begin share buybacks that offset this share dilution, PATH has been ¨spending¨ about 28% of its revenue on SBC and 16% on buybacks. I assume that the buybacks will increase to 20% as cash flow rises and SBC falls to 20% a level still quite high but in line with a start-up or developing company. This lower SBC and higher buy-backs should have a very positive impact on the stock price in 2025 and 2026 in my view. Created by author with data from Capital IQ  Created by author with data from Capital IQValuation The consensus price target of US$27.9 backs into a PE of 45x or a 2x PEG vs cash EPS on 2024 estimates, which seems somewhat expensive vs the Nasdaq (NDX) and many peers. In my view, the stock needs an acceleration in growth dynamics to reach the consensus price target or may face downgrades. I calculated a YE25 price target based on consensus cash earnings growth but with a lower PEG of 1.5x and arrived at a US$27 price target, which suggests the stock may be ahead of fundamentals. For YE26 when cash EPS may grow 80% the stock could see far higher upside potential even at a lower PEG target. Valuation (Created by author with data from Capital IQ)Conclusion  I rate PATH a hold. This a tough call, on one side the consensus estimates do not seem to support the YE24 price target and are more indicative of the YE25 potential valuation. However, there may be an upside risk to estimates if GenAI adoption can accelerate RPA demand. Thus, risk-reward seems balanced and worth holding the shares.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"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":"4.24.2","shortVersion":"4.24.2","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/2438370253"}