The AI megatrend has driven a spectacular rally among stocks in the tech sector. However, the rally is primarily driven by a handful of big tech giants such as Nvidia (NVDA), Microsoft (MSFT), Meta Platforms (META), Apple (AAPL), Alphabet (GOOGL), and Amazon (AMZN). Alternatively, there are several other AI stocks, such as UiPath (PATH), that are trailing the broader markets and peers by a wide margin. Still, I am bullish on UiPath due to its improving financials, cheap valuation, and expanding addressable market. I believe it’s a good AI investment for the remainder of 2024.
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An Overview of UiPath
Valued at $6.4 billion by market cap, UiPath is an enterprise-facing automation platform that offers a range of RPA (robotic process automation) solutions to clients in verticals such as banking, healthcare, insurance, manufacturing, retail, telecom, and several others.
It offers a suite of integrated software solutions to build, manage, run, engage, measure, and govern automation processes. Moreover, the platform embeds AI, machine learning, and natural language processing capabilities to enhance decision-making and information processing.
A Massive Addressable Market
According to a research report from Grand View Research, the global robotic process automation market was valued at $2.94 billion in 2023. The market is forecast to expand by almost 40% annually through 2030, which means it should reach roughly $30 billion by the end of this decade.
The COVID-19 pandemic accelerated the shift toward automating business workflows globally, which should be a secular tailwind for UiPath and its peers. However, UiPath’s growth story is far from over, given that its sales in the last 12 months have totaled $1.35 billion.
Strong Customer Adoption
Similar to other SaaS (software-as-a-service) companies, UiPath generates the majority of its sales from subscription sales, which rely on customer adoption. This business model ensures that UiPath generates stable and recurring revenue across business cycles. UiPath ended Fiscal 2024 with annual recurring revenue (ARR) of $1.508 billion, an increase of 21% year-over-year, while net new ARR stood at $44 million.
The key driver of sales for SaaS companies such as UiPath is the expansion of the customer base and higher spending. UiPath ended Q1 with 10,800 customers and added customers such as Flexjet, Zen Business, and Calix in the March quarter.
An uncertain macro environment in the last two years has meant that UiPath continues to face customer attrition from smaller companies. Alternatively, the number of customers with an ARR of at least $100,000 has increased from 1,858 to 2,092 in the last 12 months. In this period, the number of customers with an ARR of more than $1 million has increased from 240 to 288.
UiPath emphasized that it added a record number of customers with an ARR of $5 million or more in Fiscal 2024. It ended Q4 with a dollar-based net retention rate of 118%, which means existing customers increased spending by 18% in the last 12 months on the UiPath platform.
UiPath claims its platform capabilities are driving expansion across the customer base. For instance, Red Bull began using UiPath for core automation and expanded its subscriptions to include other processes.
UiPath’s annual recurring revenue has increased from $977 million to $1.51 billion in the last two years, indicating an annual growth rate of 24.3%.
Is UiPath Stock Undervalued?
Analysts tracking UiPath expect adjusted earnings to narrow by 30% year-over-year to $0.38 per share in Fiscal 2025 (ending in January). However, earnings are forecast to expand to $0.44 per share in 2026.
So, priced at 32.7x forward earnings, UiPath might seem expensive, given that the median multiple is much lower at 24.38x. Moreover, according to data from Finviz, UiPath is forecast to expand its adjusted earnings by 35% annually between 2023 and 2028. So, UiPath should end Fiscal 2029 (ending January 2029) with adjusted earnings of $2.4 per share based on that estimate.
Now, if the stock is priced at 30x forward earnings by then, it will trade around $72 per share, indicating upside potential of over 500% from current levels.
UiPath is also undervalued in terms of its free cash flow yield. For instance, the company expects to end Fiscal 2025 with adjusted free cash flow of $300 million, which means it trades at 21.3x forward free cash flow. Comparatively, AI bellwether Nvidia reported free cash flow of close to $15 billion in Q1. If its free cash flow totals $60 billion in Fiscal 2025, the stock is priced at a much higher multiple of 41.2x.
Is UiPath Stock a Buy, According to Analysts?
Out of the 19 analysts tracking UiPath, two have Buy ratings, 17 have Hold ratings, and none recommend a Sell, indicating a Hold consensus rating. The average PATH stock price target is $15.62, indicating upside potential of 40.3% from current levels.
The Takeaway
UiPath stock trades at a cheap multiple, given its growth forecasts and earnings expansion. Moreover, the expansion of its customer base and higher spending, coupled with a rapidly growing addressable market, make UiPath look like a good investment right now.
