At face value, UiPath’s (NYSE:PATH) business sounds like disruptive innovation. Robotic process automation, or RPA, handles repetitive tasks that would make digital transformation a reality. But UiPath stock is not a good buy here. But what’s the catch? Why did PATH stock collapse since posting its earnings report on March 30, 2022?
Investors who bought into UiPath’s prospects of incredible growth are now scrutinizing the company’s moat. Microsoft (NASDAQ:MSFT), which is also at risk of testing 52-week lows, may easily infringe on UiPath’s product offering.
To sustain its edge, UiPath announced a strategic partnership recently.
UiPath announced a strategic partnership with NCS for the deployment of automation capabilities. This will position UiPath in the Asia Pacific with its automation-first approach to service delivery.
Organizations seeking automation solutions will improve operational efficiencies and optimize for emerging technologies. Those fancy marketing words encapsulate UiPath’s appeal to potential customers.
To put it another way, as shareholders pressure companies to maximize profits, they will need to automate tasks where possible.
Stock markets may have shunned UiPath’s highly unfavorable valuations, such as its 10 times price-to-sales ratio. Its market capitalization of around $8 billion is also too high. After all, many investors also anticipate a sharp slowdown in UiPath’s growth. For a more reliable alternative, investors could bet that Microsoft’s RPA solution will grow.
In the fourth quarter, UiPath posted annual recurring revenue that grewby 59% year-on-year to $925 million. For the current quarter, it forecasted revenue in the range of $223 million to $225 million. Furthermore, the non-GAAP operating loss will range from negative $30 million to negative $25 million.
The Invesco QQQ Trust (NASDAQ:QQQ) is in a sudden but sustained reversal from the pandemic-driven highs of 2020. UiPath must find a path to profitability within a quarter, not a year. For the fiscal full-year 2023, UiPath forecasted non-GAAP operating income of break-even to just $10 million. That would value PATH stock at a forward price-to-earnings ratio of 1000 times.
Bottom Line on PATH Stock
UiPath is facing a serious P/E contraction. This is what happens when markets are dumping technology stocks. They will park their money in safer bets like Microsoft or the Nasdaq exchange-traded fund the QQQ. The ETF holds a diversified basket of technology companies. Among them is Microsoft, whose business is thriving from cloud software demand. RPA is among Microsoft’s broad solutions offering.
Still, UiPath shares will eventually bottom. It is a promising company. Its valuations are just too high to consider buying during a bear market. Wait until signs of a turnaround surface.
On the date of publication, Chris Lau 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.