What Can Happen with Overpriced IPOs, Down the Beaten Path, UiPath Earnings

Automation software company UiPath (PATH) shares plunged over 27% wiping out more than $4 billion in market cap after earnings. $PATH beat by $0.02 and beat on revenues BUT guided Q1 revs below consensus and guided FY23 revs below consensus. The stock is now down more than half off its April 2021 IPO price of $56 and 78% from its high at $90. At the time TC warned of the overvaluation and promptly added the stock to the TC dribbler basket. Here we are the stock traded down to $20.52 a market cap of around 9.20 billion.

Down the Beaten Path, UiPath Earnings

UiPath reported fourth-quarter earnings after the bell Wednesday with the stock rocked 29% after revealing a loss of $63.1 million, or 12 cents a share, versus net income of $26.3 million in the year-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were 5 cents a share, compared with 9 cents a share in the year-ago period.

Revenue rose to $289.7 million from $207.9 million in the year-ago quarter. The company’s ARR rose 59% to $925.3 million from a year ago.

ARR guidance lowered sharply

Analysts had estimated earnings of 3 cents a share on revenue of $283 million and an ARR of $902.5 million, based on UiPath’s forecast revenue of $281 million to $283 million and ARR of $901 million to $903 million for the fourth quarter.

For the year, UiPath expects revenue of $1.08 billion to $1.09 billion and ARR of $1.2 billion to $1.21 billion, while analysts had been forecasting revenue of $1.26 billion and ARR of $1.26 billion.

Path executives forecast first-quarter revenue of $223 million to $225 million and an annualized renewal run rate, or ARR, of $960 million to $965 million for the first quarter, while analysts surveyed by FactSet expected revenue of $247 million and ARR of $968.2 million. (ARR is a metric often used by software-as-a-service companies to show how much revenue the company can expect based on subscriptions.)

More uncertainty hit the stock after UiPath said that Chief Revenue Officer Thomas Hansen was leaving the company but would stay on until the end of the first quarter. The company also appointed Chris Weber, a former Microsoft Corp. executive, to the position of Chief Business Officer.

Executives blamed the forecast miss on the change at the top of the sales structure, as well as the continuing invasion of Ukraine by Russia. UiPath has customers in the region and executives said that the conflict would disrupt their business.

“Looking ahead, we feel confident in our market leading position in automation and prospects for future growth at scale but believe it is prudent at this time to factor both our European exposure and go-to-market leadership transition into the financial outlook,”” Chief Executive Daniel Dines said in a statement.

Analyst Response

17 analysts lowered their targets in response to the earnings.

Oppenheimer analysts called the guidance “disappointing,” writing “the issues are macro and internal sales leadership/execution.” They lowered their price target to $35 from $56 Thursday

“In general, we favor higher growth at a lower valuation, but also recognize that the bear narrative on competition remains in charge,” they wrote.

UiPath’s Overpriced IPO Came Home to Roost

PATH UiPath’s last year launched a successful IPO and at the time we speculated that the rich valuation may still come in play and indeed it has from $69.50 down to $21. We were skeptical with the RPA market is somewhat limited. There are competitive risks from APIs and the likes of Microsoft (MSFT) longer term. Yes UiPath is backed by Alphabet’s (GOOG/L) VC arm CapitalG.

IDC forecasts a $30B TAM by 2024 but the company sees a $60B addressable market. UiPath (PATH) priced a 23.9M share IPO at $56, above the expected range of $52-54, which was increased from 21.3M shares at $43-50/share.

This deal values the equity at $31.4B, giving the company a ~$30B enterprise value. This will technically qualify as a “down round” after the company raised money at a $35B valuation in February.
UiPath is the clear leader in robotic process automation (RPA). It helps companies automate mundane repetitive tasks.

Uipath went public right in the midst of the Coinbase Global (COIN) frenzy that enveloped the IPO market at the time. UiPath lifted the expected price range from $43-$50 share to $52-$54, PATH’s upsized 23.9 mln share IPO priced at $56 and then opened for trading at $65.50.

PATH’s high-double digit growth helped lure investors in. However if you recall PATH’s team of investment banks, which included Morgan Stanley, JP Morgan, and BofA Securities, may have created a bit of an illusion that demand was stronger than it appears. By initially pricing the deal conservatively, it was a near certainty in the COIN frenzied world that the projected price range would be moved higher and hence the frenzy.

Notably the number of shares offered was only slightly increased by 2.6 mln share from the original expectation. The point we were making on the desk was the IPO higher price range maybe masking some ongoing hesitancy from investors overpriced tech stocks. This back at the time went straight into the dribbler basket and here we are.

It was notable that PATH’s IPO price was below the $62/share that private investor paid out in a February financing round. Throw in the fact the pomp-and-circumstance surrounding COIN’s debut, the stock is now trading about 15% below its opening price.

Other recent high-flying tech IPO’s like Coursera (COUR), Olo (OLO), and Coupang (CPNG), have also stumbled of late.

With a trailing P/S of north of 50x, PATH definitely fits the mold of a dribbler favored tech stock with a frothy valuation. With the company’s growth massive as its robotic automation software gained increasing traction across varying industries.

Back to the IPO, for the fiscal year ended January 31, 2021, total revenue surged by 81% to $607.6 mln with annual recurring revenue growth of 65%. One of the most impressive metrics was PATH’s FY21 dollar-based net retention rate of 145%, illustrating that its land-and-expand approach was working wonders. The company’s strategy is to let new customers test out its AI-enabled platform, enabling its so-called “software robots” to perform a few tasks like logging in to applications or extracting information from documents. The old catch and release people wary cited at the time, as customers see the value in its platform, PATH looks to sell and deploy more robots, increasing the number of users in the process.

Path’s loss in FY21 shrunk considerably from the ($517) mln loss experienced in FY20. The theory was that PATH is still very early in its growth curve, and the trend towards worker automation and enhanced operational efficiencies will only escalate. Any failure on this theory would bring tears which is what has happened. From here it is the question of whether the recent drop off is from specific situations like the problems in Eastern Europe or has this been happening fora while as the share price suggests.

Supported by the rising number of business processes that can be improved by automation, especially as the digitization of businesses continues to skyrocket, PATH estimates that its global market opportunity stands at more than $60 bln. The bottom line is that PATH’s growth story is one of the most compelling to come through the IPO pipeline in recent months, but the timing of its IPO is less than perfect as investors have shied away from expensive technology stocks.

Another way of looking at it is the banks and pioneers priced and timed the IPO to perfection.
PATH’s performance was impressive. Revenue grew 81% to $608M last year with ARR up 65% to $580M. Dollar-based net retention rate was 145% last year. The company’s 6000 customers included 8 of the Fortune 10 and 63% of the Fortune 500. Like a typical SaaS business, gross margins are high (89% last year) and operating losses narrowed significantly last year, with the potential for ~20% adj. operating margins longer term.

The deal valued PATH at a huge ~49x trailing revenue, or something like ~30 forward sales, depending on growth assumptions. The appetite for high growth technology stocks took a hit since the market topped in February with Snowflake (SNOW) down 50% and C3 (AI) down 67% from their respective highs. PATH though is a much higher quality play on AI compared to C3 (AI) (another in the dribbler basket) based on its financial performance.

From The Traders Community Research Desk

Source: TC, UiPath