UiPath (NYSE:PATH) is a leading robotic process automation (RPA) company. In other words, that means that UiPath makes software that helps automate routine clerical functions such as data entry. PATH stock was initially a highly-valued asset following its initial public offering (IPO) as investors believed it would have a long runway for growth.
The company’s appeal is obvious. Firms are paying high salaries to office workers for their unique skills and education. Ideally, it would make sense to have them doing tasks that can’t be automated. By using an RPA solution such as what UiPath offers, it allows the human workers to spend more of their time on what matters rather than the routine paperwork.
Despite the favorable long-term trajectory for the product category, however, PATH stock has become one of the most high-profile decliners over the past year.
Why PATH Stock Has Plunged
The biggest issue for UiPath has simply been that it’s been in the wrong place at the wrong time. That is to say, UiPath’s sector is dramatically out-of-favor right now. There have been 50% to 75% drops virtually across the board for all sorts of small innovative technology companies.
This can be seen most clearly in something like Cathie Wood’s Ark Investment funds. These various Ark funds have lost 50% or more of their value since their respective peaks. PATH stock is currently the No. 8 largest holding in the combined Ark set of fund holdings.
Look across the list of top positions there and it’s been terrible across the board. Other top ten Ark holdings such as Block (NYSE:SQ) and Teladoc (NYSE:TDOC) are also in freefall. In this environment, people aren’t necessarily judging each of these companies on their own merits, but rather reducing exposure to the whole basket of stocks. PATH stock has gotten caught up in the panic, even though it has better fundamentals than most.
Operating Results Remain Strong
Another big piece of the equation is that UiPath’s actual business remains strong. While the stock price absolutely cratered, the core business remains robust.
UiPath doesn’t report full-year results until March 30. That’s in large part because the company’s fiscal year ended Jan. 31 instead of in December. So we don’t have Q4 numbers to look at yet.
For Q3, however, UiPath’s results were better than expected. The company broke even on an earnings basis, which topped expectations. It also posted a stellar 50% year-over-year revenue growth rate, easily exceeding analyst forecasts. The company’s annual recurring revenue (ARR) grew at an even faster 58% growth rate.
This shows strong and in fact accelerating momentum for the business from a top-line perspective. And, unlike some tech companies, UiPath does a reasonably good job converting revenues into bottom-line results. It earns a stellar 85% gross margin, and has done fairly well in controlling expenses. As such, the company is already achieving profitability; it guided to a small operating profit for Q4.
In addition, the company had nearly $2 billion of cash on hand at the end of last quarter. Given the current depressed market capitalization of around $16 billion, that means more than 10% of UiPath’s market cap is cash at this point. This gives the company tremendous flexibility in plotting its continuing growth strategy, especially since it is already on the cusp of achieving positive operating income.
PATH Stock Verdict
It’s been an absolute disaster for so-called disruptive technology stocks such UiPath. And there’s no assurances that this past week marked the ultimate bottom for the sector. There are a lot of unprofitable firms out there that still have dubious valuations. And the Federal Reserve’s interest rate hiking campaign is just getting started. It’s not hard to visualize a scenario where Ark and other such funds fall to further lows dragging top holdings like UiPath down with them.
That said, for people that are going bottom-fishing amid these beaten-up stocks, UiPath should be right near the top of the list. The company has already achieved tremendous scale, with revenues expected to top $1 billion annually in fiscal year 2023. In addition, it is converting those revenues into bottom line results, with the company already about to start generating consistently positive earnings per share (EPS) numbers. The company’s latest new contract with the Internal Revenue Service (IRS) should further increase this momentum.
This all adds up to a company that can lead the way once tech stocks find their footing again. PATH stock will be volatile, no doubt. However, if the sector as a whole can find any sort of stability, PATH shares could rally sharply from here.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
