1 AI Stock To Buy On The Dip

A couple of years ago, UIPath (NYSE:PATH) share price came within touching distance of $90 per share. Since then, it has fallen by 81%, a catastrophic decline for shareholders who have held on throughout the plunge.

But all hope is not lost because this leader in robotic process automation is showing signs of life that could lead to a big turnaround.

Path Revenues March Higher Every Quarter

Wall Street analysts always have an eagle eye on profits but revenues are the oxygen of a firm, providing a company with the resources to breathe a little easier, whether that means investing in R&D, marketing, or simply adding more to the bottom line. Fortunately, UiPath continues to report ever higher revenues.

For the past nine quarters in a row, year-over-year revenue growth has been higher. So naturally you might wonder why the share price has declined when the fundamentals appear to have been improving? 

The pace of growth reveals the answer. While the top line has continued to climb, the growth rate has slowed from 64.6% in the Q2 2021 quarter to 18.6% in the Q3 2023 quarter.

Another concern is evident by analyzing the PATH’s operating income, which has been negative in all but one quarter of the last twelve.

Eventually that negative sequence accumulates into a significant cash burn, though investors don’t have to be overly concerned yet because the balance sheet has $1.3 billion of cash and $469 million of short-term investments to fuel further expansion.

Massive Market Opportunity

What has kept bulls optimistic about UiPath’s future is not just the steady revenue growth and sturdy balance sheet, which incidentally has very little debt of just $63 million, but also the sheer size of the market it is targeting.

UiPath has significant exposure to the healthcare market which has embraced robotic process automation, and is forecast to grow rapidly at a CAGR of over 40% through 2027. According to The Forrester Wave, UiPath leads all of its rivals with its current offering and strategy.

And management’s approach, though not resulting in positive EBIT yet, has turned levered free cash flow positive over the last three quarters, eclipsing $43 million last quarter alone.

The combination has led to positive sentiment from analysts too.

Ui Path Analysts Price Target

For the upcoming earnings period, ten analysts have revised their estimates higher. They range from $16 to $25 per share, but the consensus estimate share price target is $19.59 per share.

One key metric that likely has won over analysts is the company’s gross margin, which is sky high at 85% last quarter. Indeed, gross margin has been north of 80% for the past eight quarters, and it only dipped below 80% once in the past three years.

After running a discounted cash flow forecast analysis, we arrived at a similar price target for UiPath as analysts. Our calculation revealed a fair value of $18.91 per share, right in line with the average forecast.

Speaking of forecasts, the future looks bright for UiPath.

What Does The Future Hold for UiPath?

According to analysts, revenues should grow over the coming fiscal year by about 27% to $1.27 billion and continue upward to $1.5 billion by FY 2025.

As a group, analysts are expecting revenues to eclipse $1.7 billion, $2.0 billion and $2.3 billion in fiscal years 2026, 2027 and 2028 respectively.

The big question is when will all that revenue growth translate to positive earnings per share, and it appears investors won’t have to wait too long if analysts are right. The expectation is for EPS to rise to $0.41 per share next year and to more than double to $0.87 per share by FY 2028.

The financial projections are predicated on the company’s platform integrating well with other enterprise systems, and to-date that has been achieved. It’s accurate to say PATH has built a scalable platform that is robust and user-friendly, making it a popular choice for businesses aiming to streamline processes through automated flows.

A buzz has grown around UiPath because it was the first robotics process automation firm to include artificial intelligence in its automation workflows, and is reported to have boosted efficiency by as much as 80%.

Management’s ability to innovate ahead of the pack is one reason UiPath enjoys a 63% share of market according to Gartner with Automation Anywhere a distant second with 17% share.

Is UiPath a Good Stock to Buy?

UiPath has lots going for it, including steadily growing revenues, a market leadership position, and levered free cash flows turning positive.

It’s also won the support of analysts in recent months, ten of whom have upgraded their forecasts for the firm. 

So, to the key question is UiPath stock undervalued? UiPath is only marginally undervalued according to analysts estimates, which place fair value at $19 per share.

With a market capitalization of $9.5 billion, PATH is trading at about 8.5x sales, not an especially lofty multiple considering its potential to more than double its top line over the next five years.

Still, the company is priced at a premium which factors in fast-paced growth for the foreseeable future. That is a double-edged sword because it means any operational mis-steps will likely be met with punitive selling and Wall Street downgrades.

Nonetheless, it’s not often you can buy a market leader down by over 80% in share price over a couple of years that is showing strong financials and solid overall fundamentals.

If there is a time to take the plunge with PATH, now might be as good as any. The reward to risk ratio currently favors the bulls. After all, the share price has been over 5x higher in the past while it’s low was around $10 per share. That’s the kind of upside opportunity to downside risk ratio that makes UiPath very tempting.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.