Shares of office automation specialist UiPath(NYSE: PATH) have tumbled by more than half since the start of 2024. This isn't surprising because demand for the type of services it offers is growing by leaps and bounds.
UiPath specializes in robotic process automation (RPA), which is increasingly popular among office managers who want a more efficient workforce. Its software can observe employees perform mundane and repetitive tasks, such as payroll processing, and then repeat those processes so they're free to tackle more complicated projects.
The global RPA market was estimated at $2.9 billion in 2023 and is projected to grow by 39.9% annually through 2030, according to Grand View Research. As a leader in the RPA industry, UiPath could deliver market-thumping gains if it continues growing at the same pace as the industry it pioneered.
Why UiPath stock has been beaten down
During its fiscal second quarter that ended on July 31, Uipath reported fiscal second-quarter sales that grew just 10% year over year. That's roughly one-fourth the pace of growth expected for its industry.
UiPath integrates generative artificial intelligence (AI) services into its RPA software, but it may be too little, too late. One of UiPath's competitors, C3.ai(NYSE: AI), markets a more AI-focused approach and is outperforming. During C3.ai's fiscal first quarter that ended July 31, revenue rose 21% year over year.
In addition to C3.ai, UiPath has to contend with Microsoft(NASDAQ: MSFT) and its Power Automate solution. Nearly all of the businesses UiPath would like to engage already have Microsoft Office products embedded in their workflows. Microsoft doesn't break out Power Automate details, but its Power Platform, which includes Power Automate, finished June with 48 million monthly active users. That was 40% more than it had a year earlier.
Microsoft's position in the RPA space is expanding rapidly. At the end of the second quarter, 480,000 organizations had used AI-powered capabilities in Power Platform. That's 45% more organizations than it reported at the end of the first quarter.
A revenue-growth deceleration wouldn't be such a big deal if UiPath were already profitable, but it's still a long way from making ends meet. The company lost about $115 million in the first half of the year.
How UiPath could bounce back
UiPath can afford the losses it's been reporting for at least a few more years. The company finished July with $1.7 billion in cash.
While UiPath is losing heaps of money according to generally accepted accounting principles (GAAP), it also reported $183 million in non-cash stock-based compensation expenses. If we adjust for stock options and other non-cash expenses, the company reported cash from operations that grew to $146 million in the first half of its fiscal year.
In August, Gartner, a well-respected research firm, recognized UiPath as a leader in the RPA space for the sixth year in a row. Gartner gave UiPath a higher rating than Microsoft, which could attract new enterprise-scale clients.
Despite competition from Microsoft, UiPath's largest clients are sticking around. The number of UiPath customers expected to contribute more than $1 million annually to topline revenue grew 15% year over year to 293 in the second quarter.
A bargain now?
Expectations for UiPath are still fairly high despite decelerating sales growth. The stock has been trading for about 29.4 times forward-looking earnings expectations. That's a fair valuation for a company growing top-line revenue by 10% annually, but UiPath's growth rate could slow down even further.
I'm not about to sell my shares of UiPath, but I'm not in a hurry to buy more, either. Before risking another dollar on UiPath stock, it's a good idea to watch Microsoft's Power Platform for at least two more quarters to see if it will continue eating UiPath's lunch.
Should you invest $1,000 in UiPath right now?
Before you buy stock in UiPath, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and UiPath wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $662,392!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 9, 2024
Cory Renauer has positions in UiPath. The Motley Fool has positions in and recommends Microsoft and UiPath. The Motley Fool recommends C3.ai and Gartner and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
