Down -25% on the day after reporting earnings... and -75% from the highs almost an year ago (half-off its April 2021 IPO price of $56 a share). UiPath, as you may know, is a Cathie Wood ARK Invest stock. But wait.. before you run for the exits (lol), let me tell you, the business fundamentals are strong. No one can argue that. What we need to answer, is whether the valuation is now (post-drawdown) attractive? So, stick around.
From their About page, we see UiPath was founded in 2005 and based in Bucharest – which is in Romania, which borders Ukraine. In the really odd case you didn't know, Ukraine is in a war with Russia right now. So, that's important to note, because they do note impacts from this war in their earnings.
They started with a 10-person team, but has had significant growth since – which we'll get into. The co-founders Daniel Dines and Marius Tirca are still onboard – which is a critical plus point imo. Their Cheif Revenue Officer, Thomas Hansen, left the company to pursue other opportunities, which was not ideal for them. But, after staking his LinkedIn profile, he's only been there for 2 years. He has some shared Microsoft experience with the founders, but (not to be mean, but...) I don't see him departing as a significant asset to the company or its growth.
Their goal, is simple... I like it... "building the world's best RPA software" and "wanting a robot for every person". WTF does that mean?
Robotic Process Automation (RPA)
RPA, according to UiPath, a software technology that makes it easy to build, deploy, and manage software robots that emulate humans actions interacting with digital systems and software. Basically, it automates various aspects of everyday business which promotes efficiencies (i.e. cost savings, accuracy, happier employees – though probably less of them lol). Think of it as a software robot.
It's best to just understand this with real life examples, rather than fancy words. You can see them at UiPath's website as they relate to healthcare (i.e. claims processing), banking (i.e. automated credit assessments), insurance, etc.
In finance, I've used RPA, in the form of automating bookkeeping or bill entries. You may be familiar with Bill.com. That uses OCR (optical character recognition) technology which basically reads scanned documents for entry. Any process involving RPA, is most effective when combining it with some human check, and also AI (artificial intelligence).
RPA + AI (including machine learning) can create fully end-to-end automation.
How does UiPath make money?
UiPath offers a SaaS where users (i.e. companies) can customize their automations. They offer the service on their own cloud, public clouds such as AWS, and even hyrbid/offline versions. As these customers come on the platform, they stick. They have a really impressive 145% dollar based net retention rate.
Their customers are very diversified across industries, and I'm confident this list will continue to grow. But, how fast?
Key Operating Metrics
UiPath considers ARR (annual recurring revenue) as its key operating metric, which has been growing at 60% YoY. In the fourth quarter of 2021, this number reached $925M.
This correlates pretty closely to revenues, but let's take a look at those along with valuation...
Valuation & Forecasts
As a reminder, all valuation sheets are available to premium members of The Hawk Letter and Discord. I highly recommend you join, to make your own assumptions and investment thesis :)
I'll be honest... when I first saw the Q4 numbers and the dramatic slowdown of growth, and put in the revised forecasts, I didn't think this was going to be pretty. But, even after dramatically lowering their sales growth forecasts (to 20% CAGR until 2026), and assuming an 8x P/S ratio $1.8bn, we get 50% upside to $32/share.
It's a worthwhile risk, with some margin of safety.
But, when we compare it to (what I'd consider the top tier of SaaS) Salesforce ($CRM). You have a similar upside there in the shorter-time frame. You can access the previous post and valuation sheet here, for reference. So, that makes me wonder why I would bet on UiPath versus Salesforce with a shorter-time horizon... especially with economic growth slowing... but, maybe go for both?
Aside from the macro risks, and customer risks (which I think are minimal, given their diversification), I think competition is one worth considering.
Based on G2, and my own research (without being a user of the platform), their main competitors are Automation Anywhere and Blue Prism. It seems like Automation Anywhere is the bigger threat, which is a private company. But, given their private, they likely didn't experience a slash of 50% in their EV like UiPath just did since IPO.
There is a clear downward trend in SaaS names, however. So, jumping in now presents some risks and you'd have to DCA.
I personally did feel like SaaS names overall were overvalued, but now they are reaching more attractive valuations. It also concerns/annoys me that they don't seem to care for profitability. Even the biggest names like Salesforce, spend a lot on S&M and cash flow positive with SBC. The employee morale in these places must be low after experiencing the highs (and now the lows) of their stock options. But, I consider an entry to UiPath as a very risk-on play with a much longer time horizon. I'm considering an staring a very small position here, but would also start a larger position in Salesforce with the same logic. It wouldn't make sense to me making a move on one, but not the other.
What are your thoughts?
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