Global software company UiPath Inc. (PATH), which is headquartered in New York City, offers an end-to-end automation platform for robotic process automation (RPA) solutions, primarily in the United States, Romania, and Japan. The software vendor’s stock rose 23% in price on its market debut on April 21, 2021. And robust ARR growth and expansion with existing customers helped the company maintain strong momentum in its last reported quarter.

PATH’s ARR rose 60% year-over-year to $726.5 million, while its net new ARR grew 30% from its year-ago value to $73.9 million in the second quarter of its fiscal year 2022.

However, PATH’s shares have retreated 10.2% in price over the past month and 23.5% over the past three months, ahead of its lock-up expiration date. Although the software company’s groundbreaking Academic Alliance program should help it capitalize on the growing demand for automation, increasing competition from dominant players in the industry could challenge its market share growth. Furthermore, the company’s  significant cash burn and stretched valuation could cause its shares to retreat further.

Here’s what could influence PATH’s performance in the coming months:

Positive Developments

This month, PATH announced that its Academic Alliance program now includes more than 1,000 higher education institutions and workforce development organizations. As more organizations embrace an automation-first strategy, the program’s curricula and free enterprise-level automation software should see greater demand from colleges, government bodies, and professional workforce organizations.

In July, leading advertising agency network, Dentsu, adopted the company’s Automation Cloud to provide artificial intelligence (AI) capabilities and automation at scale across its enterprise. PATH’s robust automation and AI infrastructure should help businesses innovate faster and benefit from the reduced burden on IT support.

Increasing Competition

With numerous organizations opting for Robotic Process Automation (RPA) technology services to automate repetitive tasks and streamline business processes, the global automation services industry has become highly competitive. Because  tech giants like Microsoft Corporation (MSFT) and International Business Machines Corporation (IBM) are increasingly collaborating with prominent niche players to leverage their market growth potential and acquire a large customer base, PATH could face a roadblock in its growth path.

Mixed Financials

PATH’s revenue increased 40.3% year-over-year to $195.52 million in its fiscal second quarter, ended July 31, 2021. Its gross profit came in at $159.93 million, representing  28.3% growth from the prior-year period. In addition, its net increase in cash and cash equivalents stood at $1.46 billion for the six months ended July 31, 2021. But the company’s non-GAAP adjusted free cash flow was  negative $3.5 million. Its net loss rose significantly year-over-year to $100.03 million, while its operating loss grew 474.5% year-over-year to $97.82 million.

Its $1.59 million trailing-12-month cash from operations is 98.7% lower than the $118.67 million industry average. PATH’s net income  and EBITDA margins are negative 52.1% and 50.4%, respectively. However, its 0.9% asset turnover ratio is 35% higher than the 0.7% industry average.

Stretched Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 3,355.89x, which is 13,493.8% higher than the 24.69 industry average. Also, its 30.69 forward EV/Sales multiple is 645.5% higher than the 4.12 industry average. Moreover, PATH’s 103.26 non-GAAP forward PEG ratio compares with the 1.78 industry average.

POWR Ratings Reflect Uncertainty

PATH has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. PATH has a C grade for Quality. The stock’s mixed profitability is in sync with this grade.

The company has a C Momentum grade, which is consistent with its price returns over the past month.

In terms of Value Grade, PATH has a D. This justifies the stock’s premium valuation multiples.

In addition to the grades we’ve highlighted, one can check out additional PATH ratings for Stability, Sentiment, and Growth here. PATH is ranked #36 of 60 stocks in the D-rated Software – Business industry.

Click here to check out our Software Industry Report for 2021

Bottom Line

Surging demand for robotic process automation for automating repetitive tasks has boosted leading automation company PATH’s ARR. However, the stock’s premium valuation amid intensified competition from established players has added uncertainties to its prospects. Therefore, we think investors should wait for its valuation to stabilize before investing in the stock.

How Does UiPath (PATH) Stack Up Against its Peers?

While PATH has an overall C rating in our proprietary rating system, one might want to consider taking a look at its industry peers, SS&C Technologies Holdings, Inc. (SSNC) and Software AG (STWRY), having an A (Strong Buy) rating.

PATH shares rose $1.16 (+2.15%) in premarket trading Friday. Year-to-date, PATH has declined -20.58%, versus a 19.93% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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