onurdongel
UiPath Inc (NYSE:PATH) is a leading enterprise software company that develops and provides a platform for robotic process automation (RPA). RPA is a technology that uses software robots or digital workers to automate repetitive and rule-based tasks, such as data entry, invoice processing, customer service, etc. UiPath’s platform consists of several components, such as UiPath Studio, UiPath Robot, UiPath Orchestrator, and UiPath AI Fabric. These components enable users to design, execute, manage, and optimize their automation workflows.
The increasing popularity of AI technology has been kind to PATH stock this year, with the stock rising 30% YTD. However, UiPath stock is still trading at a substantial discount to its post-IPO stock prices of over $75 in 2021. Soon after its IPO, the company became a darling among growth investors with Ark Invest’s Cathie Wood investing in the company. According to the data published by Ark, many of its funds have invested in UiPath at stock prices above $60. Today, Ark owns almost 10% of UiPath.
Exhibit 1: Ark Invest’s UiPath ownership
Cathie’s Ark
Whether or not AI stocks are in a bubble is up for debate, but what I do know is that UiPath is emerging as a true winner of this technology with its innovative product portfolio. I am hooked on the company’s story, but from a valuation perspective, I prefer a wider margin of safety to invest in the company or a strong track record of free cash flow generation.
How Does UiPath Use AI And Automation?
UiPath uses AI to help businesses automate processes, empower employees to be more productive, and to understand and improve their work. According to a UiPath survey, approximately 60% of participants believe that automation has the potential to mitigate burnout and enhance job satisfaction. Furthermore, 57% of respondents express a more favorable view of companies that utilize business automation to support their employees and modernize their operations compared to those that do not adopt such practices. In the context of a demanding work environment where employees are being tasked with increased responsibilities due to factors like layoffs and hiring freezes (as reported by 28% of respondents), burnout has become a prevalent issue, affecting 29% of global workers. Consequently, many employees are increasingly turning to AI tools as a means of alleviating work-related stress, leading to the emergence of what can be termed the “Automation Generation.”
Considering the increased demand for automation, UiPath provides a platform that is open, flexible, and enterprise-ready, allowing customers to integrate AI models from various sources, such as OpenAI, Google Cloud, Microsoft, and AWS. The company also has its own UiPath AI Center, a cloud-based platform that enables users to build, deploy, and manage machine learning models for their automation workflows. AI Center integrates with UiPath Studio and Orchestrator, allowing users to leverage AI capabilities such as Document Understanding, Communications Mining, and Generative AI. This enables customers to create and operate automation at scale with AI. The company has been recently named an Intelligent Document Processing (IDP) Leader for the first time, distinguishing itself as the only Star Performer in the Leaders category in the Everest Group IDP Products PEAK Matrix Assessment 2023.
UiPath is constantly innovating and expanding its AI offerings, such as adding new connectors for Google Cloud Vertex AI and Azure OpenAI and supporting the latest generative models including GPT-4. By using AI in its business, the company aims to deliver intelligent process automation solutions that elevate business value and competitive advantages for its customers. The company has also launched Project Wingman, an initiative aimed at revolutionizing the field of AI. This project seeks to simplify the process of automation for developers by offering a user-friendly experience and utilizing Generative AI to make the platform accessible to individuals without programming skills.
Growth Opportunities Amid Challenging Macroeconomic Conditions
Despite ongoing global economic challenges, Gartner’s latest forecast reveals a positive outlook for the worldwide IT spending landscape in 2023, with projections for spending to increase to $4.7 trillion, representing a 4.3% growth compared to the previous year. Within the IT industry, Chief Information Officers (CIOs) are facing a pressing issue: the fierce competition for IT talent. In response, CIOs are strategically reallocating their spending toward technologies that can empower automation and enhance efficiency, allowing organizations to achieve significant growth without necessarily expanding their workforce.
One noteworthy area of investment is software, which is expected to witness double-digit growth in 2023. Organizations are intensifying their utilization of core applications and platforms, directing resources toward tools that support efficiency improvements. Notably, the adoption of RPA and No-Code and Low-Code process automation solutions has seen a notable uptick, with 78% and 24% of businesses respectively having implemented these technologies by 2020. Since then, the adoption of automation tools has been on the rise as labor shortages, the rising cost of labor, and the rise of AI have all pushed automation into the spotlight.
Exhibit 2: The adoption of intelligent automation tools
Deloitte
The potential of automation to boost global productivity growth was highlighted by McKinsey well before generative AI made it big. Back in 2017, McKinsey called for annual productivity increases of 0.8% to 1.4% from the use of automation. I believe these expectations need to be revised upward given the technological advancements that have changed the world in the last couple of years. A recent McKinsey report sheds light on the significant impact of Generative AI on automation potential, indicating a remarkable acceleration in the pace of automation. Integrating existing technologies with Generative AI has expanded the percentage of hours that can theoretically be automated from approximately 50% to an impressive 60%–70%. UiPath is at the forefront of this transformative wave, having recently bolstered its AI offerings with Generative AI capabilities.
Exhibit 3: Automation potential
McKinsey
These transformative impacts of automation are visibly reflected in UiPath’s financial performance. In the first quarter of fiscal 2024, the company achieved Annual Recurring Revenue (ARR) of $1.2 billion, marking a remarkable 28% increase. Furthermore, the company significantly improved its non-GAAP operating margin from a negative 4% in the first quarter of the previous year to a positive 17% in Q1—a substantial stride toward UiPath’s long-term operating margin target of 20%+.
Exhibit 4: UiPath’s Annual Recurring Revenue
Earnings presentation
UiPath’s success story is further highlighted by its collaboration with industry leaders. For example, UiPath’s technology is aiding Uber Technologies, Inc. (UBER) in cost reduction efforts, with projected savings of $22 million, as 70% of their customer base is invoiced via automation. The partnership with Generali has resulted in the automation of 1,000 processes and a remarkable 80 million euros in savings within the first three years of implementation as well.
UiPath’s expansion is evident through its recent partnerships with Snowflake (SNOW), T-Systems, and SAP SE (SAP). Through its partnership with T-Systems, a cloud provider recognized by the German Federal Ministry for Economic Affairs and Energy, UiPath is expanding its presence in Europe. This partnership aims to deliver UiPath’s end-to-end automation platform at scale to public sector organizations and large enterprises across Germany, Austria, and Switzerland. Collaboratively, UiPath and T-Systems plan to develop industry-specific offerings, such as the Deutschlandticket project, which is geared toward efficiently managing demand for the new flat-rate transport ticket—a testament to UiPath’s dedication to transforming industries through automation.
UiPath’s partnership with SAP presents a compelling opportunity for the company to make a meaningful impact. This partnership is designed to provide automation capabilities to customers and facilitate the creation of a clean core on S/4HANA Cloud. This clean core complements SAP’s Build Process Automation (BPA) and extends the potential for enhancing efficiency and productivity across both SAP and non-SAP workloads.
During the Q1 earnings call, UiPath’s Co-CEO Robert Enslin highlighted the significance of this partnership by citing a real-world example involving a large global apparel and footwear company. This company, in collaboration with UiPath and SAP, migrated to S/4HANA, established a clean core, and accelerated its digital transformation. The partnership leveraged SAP’s technologies, including Signavio for process modeling, integrated with UiPath’s Task Mining and automation capabilities. Moreover, UiPath’s involvement extends beyond this specific case. For example, the platform plays an integral role in the automation accompanying the S/4HANA migration, including the use of the Test Suite. This dual-platform utilization is evident among existing customers, further emphasizing the substantial opportunity at hand.
With the expansion of partnerships and high demand for automation, UiPath’s customer base expanded to approximately 10,850 in Q1. The company also experienced significant momentum in its large customer segment, with a remarkable 43% year-over-year increase in customers generating $1 million or more in ARR to 240. Additionally, customers with $100,000 or more in ARR have grown to approximately 1,860.
Exhibit 5: Customer growth
Earnings presentation
These customer wins highlight the strong demand behind UiPath’s automation tools in an era where many businesses are trying to cut costs. UiPath’s strong performance amid challenging macroeconomic conditions suggests the company’s products and technology are being increasingly considered mission-critical.
Is UiPath Reasonably Valued?
Despite experiencing a significant decline in market value since its 2021 debut, UiPath is showing promising signs to suggest the company is on the right path to profitability. The company’s financial performance in Q1 marked a turning point as it reported positive free cash flow for the first time, signifying a substantial step toward financial stability. The management’s optimistic outlook further underscores this progress, with expectations of achieving an adjusted operating income of $168 million for FY 2024. What makes UiPath’s prospects even more compelling is its positioning within the fast-growing market of robotic process automation, valued at over $107 billion. Remarkably, UiPath currently holds a 35.8% share of this growing market, showcasing its potential to enjoy long-lasting competitive advantages in the future.
Exhibit 6: Robotic Process Automation market share
Gartner
The company has also been named a leader for the fifth consecutive year in the most recent Gartner Magic Quadrant for RPA. UiPath’s strategic advantage lies in its partnerships with major cloud industry players.
With the company turning cash flow positive, I believe using a discounted cash flow model to estimate its intrinsic value makes sense. Because the company is still in its early stages, I tried to be conservative with my assumptions for growth as the RPA market has a lot of room for disruption, which exposes UiPath to competitive threats.
Below are the revenue growth assumptions used in my model.
| Fiscal year | Revenue estimate | Implied growth rate |
| 2024 | $1.27 billion | 19.9% |
| 2025 | $1.55 billion | 22.1% |
| 2026 | $1.84 billion | 19% |
| 2027 | $2.18 billion | 18.3% |
| 2028 | $2.56 billion | 17.5% |
Source: Author’s projections
Below are some of the other major assumptions used in my model.
- EBITDA margin to grow from an estimated 15.1% in FY 2024 to 18.5% in FY 2028.
- Capital expenditures to remain stable at around 2% of revenue through FY 2028.
- An effective tax rate of 28% (very conservative estimate).
- A cost of capital of 9.5%.
- A revenue multiple of 2.5 to calculate terminal value.
Based on these assumptions, the estimated intrinsic value of UiPath comes to $12.70 per share, which implies a downside potential of 20% from the current stock price.
To clarify, I used conservative estimates to leave room for error, market disruption, and an unforeseen threat from an established tech giant that might want to aggressively expand into the process automation sector.
Takeaway
UiPath has a great story to tell. Even more importantly, the company’s story is backed by strong numbers as well. As a growth investor, I am attracted to companies that tell stories backed by numbers. UiPath seems to be fairly valued today, but I normally seek a wide margin of safety to invest in young companies that are yet to be profitable, which is the only reason keeping me from jumping on board. I would feel more comfortable investing in UiPath even at this valuation if the company can gain some momentum from the free cash flow generation front, but we will have to patiently digest the next few earnings reports to come to such a conclusion.
