UiPath has Fallen 40% in a Week, Is it a Buy?

UiPath is a software company which aims to provide business automation to automate mundane processes and repetitive work for companies.

Due to its lowered forward guidance in the latest financial results, the company's share price has taken a beating. It is worth noting till now, the company is not profitable on a full year basis. 

It has the largest market share in the software automation business, ahead of the likes of Microsoft, with many SME susing its software to automate work or even to carry out simple tasks such as sending hourly temperature readings of their server rooms or inventory management.

So is it a good business to invest now with low share price?

Business Model of Uipath

The company provides a software package where (i) subscribers pay a monthly fee to have access to the full suites of its function, (ii) free model where subscribers can get it for free but with limited function and there is an entrpise model which is a large package where 100 users get access to everything for a fee

Its software is applicable to almost all industries... which brings us to....

How Large is the Addressable Market and How will Uipath monetise users

These are the 2 questions we have to address to know the worth of Uipath.

In all honesty I do not know how large the addressable market is. Given how widespread and applicable UiPath's software is, I could say the addressable market is in the trillions of revenue. However, there are many competitors with Microsoft, IBM trying to catch up. So I would say the trillion dollar pie is split up among many companies.

The second question is monetisation. Uipath charges a fee for the access to its automation features. However, if it sets too high a price as fee, its customers may decide to switch companies. No doubt, there is a switching cost because if a company changes software, it has to re-write its codes. So there are some barriers but not too high as what Microsoft has in the operating systems segment.

What are My Personal Projections

While there is a hype going around how AI will replace human jobs and Uipath is indeed in such a business line, I do not think its revenue growth will be exciting. UiPath has been doing this for many years, so it's reach has likely reached close to maturity. Revenue wise, I forsee only a growth of 15% per annum for the next few years before plateauing to the 5% range.

The importance for UiPath is to manage its own cost as it grows, i.e. using its own software for roles to reduce manpower cost. One gripe I have about software companies is that they have to pay their software engineers a good package with stock based compensation to keep them with you.

Profits

With the continous growth in revenue, I do think UiPath can grow into profits. I personally forsee that the company will become a US$2.5 billion revenue company in 5 years time with its cost base increasing at most 40%, after all it has a business automating software which is a force mulipler. AI will replace human jobs!

In conclusion, I see UiPath as a future company which can clock US$700 million in pre-tax profits. Including US corporate taxes, it should be a US$500 million company. Setting it at a 20 times earning multiple, that means it is a US$10 billion market cap.

I do not think the software hype will warrant UiPath to be a 30 time or 50 times P/E company. This is because the business automation space has many competitors, it is not a niche industry where UiPath is the sole provider. UiPath is only worth as much as what its IP can carve for it. At US$10 billion, it means Uipath has only about 60% upside ( $18 target price)

Unless the company is able to cut its cost by automating more of its own functions or by cutting the pay of its software engineers, I do not see the company having too much of an upside.