UiPath: Buy For Strong Recovery Potential, Future Enterprise AI Growth

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Gartner forecasts a bigger increase in world IT spending for 2025, suggesting a potential turnaround for enterprise IT spending and benefiting companies like UiPath.Automation is the key value of AI ...

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There will be a 9.3% increase from 2024, which is quite significant because this increase is higher than the 8% increase estimated for 2024. So it tells us that the future for enterprise IT spending may see a turnaround in the coming years. We have witnessed the so-called \"deceleration\" of growth in the IT sector in 2024. Many tech stocks in the IT space have been hit hard in the face of the heated air about the AI revolution. The increase of the IT budget is promising to some companies such as UiPath (NYSE:PATH) who are at the center of IT applications and will probably lead the next phase of the AI resolution. PATH stock has been down over 50% in 2014 so far. With the increase in IT spending, PATH's double-digit growth and lower valuation (discussed later) seem like a good choice for investors who want to bet on AI growth and expect huge returns in the long run. The Company UiPath is a technology company that provides enterprise automation software and tools to businesses to automate repetitive tasks, simplify workflows related to business operations, and improve overall efficiency. This technology field is known as Robotic Process Automation (\"RPA\") and has been identified as having strong secular demand in the enterprise sector. There are big names such as IBM, Oracle, and newer (next generation) providers such as Amazon's AWS and UiPath in this highly competitive market space. UiPath is currently ranked fourth in the market and has built up momentum with its platform solution for end-to-end business process orchestration, execution, and lifecycle management. In fact, as stated, \"UiPath [was] named a Leader for the 6th year running,\" in RPA. The following shows the key features for the UiPath automation platform. This has been very popular among enterprise customers due to the inclusive and end-to-end nature. Users can also use the platform to build new applications and integrate their customized features. There are 5895 companies using UiPath automation products. This is a pretty large customer base, and UiPath can continue to build new features and grow business. UiPath- from UiPath UiPath was founded in 2005 and went IPO in April 2021. It has seen fast adoption of the product among enterprise users at around the IPO time. The average revenue growth over 40% for the past 5 years is shown in the data in the next section. On the other hand, the following graphic from the last Q2 report shows a rather stalled growth picture overall for the most recent year: UiPath Q2 Growth - from UiPath However, I don't necessarily view this as the company's main issue for the most part. There are macro constraints such as higher interest rates affecting customers' borrowing capabilities and slowing IT spending. More importantly, the development pattern of the product cycle itself is that after an initial rapid expansion, the growth rate seems to be reverting to a more normal pattern. In fact, it is quite common for a software technology company to see some kind of growth \"deceleration\" when it starts to make earnings and the revenue climbs over $1B. This is when revenue growth could drop to half of the peak rate. However, PATH stock has been hit pretty hard during the process, dropping about 50% in 2014 alone, because its price was pushed to an unsustainable level in the market. The true growth without the AI \"buzz word\" Forward-looking growth is the key for stock performance in the future. UiPath has been a fast growing company for many years. The following shows that the revenue growth for the past five years averages over 40%. However, the forward estimate is at 14.36%. PATH Growth - from SA I believe there are two key reasons for the growth deceleration. The first reason is that the IT budget has been growing only at a slow pace; for example, the Sector Median is at about 6% as shown above. The second reason is the product cycle. The company has already been 17 years old. The original technology product is not viewed as something brand new or cutting edge. I think that 14% growth is actually very good if it can be kept at that level for the future. Notice that one company executive (the CFO) mentioned in a recent event that I think we continue to grow 19% at scale. It is interesting to observe that 19% growth was the number given by another IT technology company, Confluent, as discussed in my previous article. This seems to indicate that the macro trend in the IT sector of enterprises is that spending may bottom out and begin to rebound. There is evidence to support such growth optimism. As mentioned in the introduction, Gartner just released the forecast for worldwide IT spending in 2025. There will be a 9.3% increase from 2024, which is much higher than the 8% increase for 2024 from 2023. Below, I apply my approach (see the linked article above for more details) to valuate PATH, as a growing technology company with under $10B in market cap:  According to SA data, PATH Price/Sales is 4.66, higher than the Sector Median 2.91. If divided by the revenue growth multiple (2.37), the relative P/S shows 83% of the median value, indicating about 20% room to catch up. As shown below, PEG Non-GAAP (forward) is 0.93, which is -49.24% of the Sector Median. I use it as a quick discount gauge. In other words, the PEG discount shows that PATH could recover to almost 100% to reach the Sector Median. This is why we see an \"A\" grade for PATH from SA under PEG Non-GAAP.  PATH Valuation - from SA I have a buy rating on PATH based on the above valuation. My initial price target for PATH will be set to between 20% to 100%. This is just for the price recovery, provided UiPath can keep the revenue growth at 14%. For the longer run, I would like to see the company deliver the top-line growth at 19% as \"promised\", and more importantly start to earn GAAP and keep strong financial momentum going based on the established solid footing on PEG Non-GAA (0.93). Automation is the right enterprise AI play How will UiPath get to a 19% growth rate from the current 14%? In the same event mentioned above, PATH CFO used the following interesting quote from a CIO of its customer. We start with AI, we end in automation. I think this summarizes everything about enterprise AI. It basically points out that the true business value of artificial intelligence lies in automation, which will help to address operational challenges and save time and money. Keep in mind that automation is a broad term that may have many use cases. The following is the product roadmap from PATH. As we can see, automation platforms such as PATH's will play an essential role for enterprises to create apps to support various intelligent operations, such as Task Mining, Document Understanding, Communication Mining, etc. Not only can these human-required actions be done by machines, but also AI capabilities can scale better than human and cover cases even humans may not be able to accomplish physically. UiPath Product Roadmap -from UiPath UiPath has structured the company back to the founder-led operation, which has been proven to be one of the most successful execution patterns for innovation companies of its kind. With the roadmap above's sole focus on AI products and the recent customer adoptions indicated by the company's executives, PATH is positioned very well to tackle the secular AI market and looks promising to get back to a higher growth mode. I have added PATH to my list of top 5 growth plays and recently opened an initial position. I believe that PATH has limited downside risks at the current trading price of $12.50 per share. I plan to add more shares if the price goes a bit lower, such as close to $10 per share. Risks and Caveats The macroeconomic condition is always a key factor in IT spending. Any signs of recession or slowdown trends would lead to the shrinking IT budget, as evidenced in the history. Automation tools may not be critical for enterprises during business downturns. PATH's current products and the roadmap for the future will be greatly affected. Under slowdown conditions, growth could go back to single-digits quickly. The stock price would perform poorly under those conditions. Competition in the business process automation space is always a risk factor. There are formidable incumbents players for business process automation. PATH is currently in the 4th place in the corresponding market shares. Any operational hiccups could make the market share to drop and jeopardize the growth potential for the company and its stock price. Closing Thoughts  PATH is a tech company, and the IT spending increase for 2025 provides a strong tailwind for the company to get back to its high-growth rate target at 19%. The company's focus on developing AI capabilities with its business automation is what's really needed for enterprises. These new features and products are the true growth driver for the company to keep its competitive edge in the market and possibly take new market shares. With its founder back as CEO, the company has been set up for more integrated and focused operations, which will be critical to truly ride the AI wave with success. The stock has been beaten down largely due to the macro (IT spending) and stock correction. It represents a great opportunity for a sizeable recovery in the short run if the current bull market can be warranted. PATH appears to also be a solid holding in the long run for investors who believe in AI growth in enterprise automation.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"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":"4.29.2","shortVersion":"4.29.2","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/2479453443"}