Summary
- UiPath RPA technology automates more than 80% of working processes.
- The company estimates more than $60 billion total addressable market opportunity.
- The company generates 80%+ gross margins.
- Buy below $62.3.
UiPath (PATH) operates in a fast growing robotic process automation industry and has leading position against its competitors. The business increases consumers' operational efficiency substantially. The management estimates more than $60 billion TAM. Our valuation models indicate that the stock is undervalued and represents strong growth opportunity.
Currently working process includes lots of repetitive and time-consuming tasks, which hurt employee productivity substantially and cost enterprises huge profit losses. Automation processes are intended to solve the issue as AI technology "learns" task executing techniques and facilitates working process significantly. UiPath technology helps employees to automate processes like extraction of information from documents, updating databases, filling in forms, logging into applications etc. The services enable firms to cut employee-hours spent on mechanical, repetitive works and use their workforce for creative tasks with heightened productivity.
UiPath offers 4 main solutions which are intended to help users to automate their working processes.
- Discover part allows users to find out new automation opportunities to reduce time spent on repetitive tasks and increase performance.
- Build part enables to automate processes which are being discovered in the 1st phase. Users can create new processes form scratch or can use ready-to-use automation tools presented on marketplace.
- Manage part enables users to manage processes, test new automation tools and conduct automation analysis.
- Engage part provides an action center where developers can determine directions and interact with automation tools.
Utility of the product is well presented in an example which indicates 5x increase of productivity of insurance claim processing team. Before the adoption of the product the 4 FTEs were able to process 5,300 claims per month while the number increased to 27,000 claims after adopting RPA solutions. RPA technology automated about 80% of the total work process as employees need to just review and approve the actions completed by the technology.
UiPath is the leader in the robotic process automation market which is estimated to be $1.57 billion total market in 2020. According to Grand View Research the industry will grow at a strong double digit growth rate recording 32.8% revenue CAGR until 2028. Increasing spending on RPA solutions is essential for businesses as it allows to cut overhead labor costs and improve productivity.
According to Gartner research UiPath is the leader in RPA industry. Gartner gave UiPath the highest ranking for the "Ability to Execute" and the third ranking for "Completeness of Vision".
Forrester Wave also ranked UiPath as the leader in RPA industry. According to the research the company has the strongest strategy, the strongest current offerings and has larger presence in market than competitors.
Meanwhile, according to IDC research, the Intelligence Process Automation industry represents $17 billion market opportunity which is expected to grow at 16% CAGR until 2024, reaching a $30 billion level. UiPath management considers that the total addressable market is much larger with $60 billion opportunity.
The use of UiPath services attracts businesses to increase their spent on the platform as case studies indicate that companies start from minimal budgets and increase their expenses in 1-2 year period. A global pharmaceutical company spent $100K in Q1 2020 while the number increased 32x in Q4 2021. A Canadian public sector agency spent $30K in FY 2020, while its expenses increased by 69x in Q4 2021.
Nielsen (NLSN) is one of UiPath's consumers. The company provides information, data and market measurement services in more than 100 countries. The company needs to collect and analyze huge amount of data in a short period of time to stay competitive in its market. The company has already deployed UiPath RPA solutions in more than 40 countries and has saved approximately 350,000 working hours during the last 18 months. Nielsen expects to cut more than 500,000 working hours per year using UiPath services. The VP of global automation and head of Center of Excellence Oleg Royz expressed his opinion about UiPath RPA solutions.
In the past, people didn’t realize that they were like the glue, managing all of these processes, and we’re changing that narrative. We tell them, don’t be the glue; be the value, and let the robots be the glue that connects the dots. So when you come to work, data is extracted and ready for you to make your analysis and provide your insights.
Global audit firm PwC also uses UiPath platform which helped the company to automate more than 200 operations. The company has already deployed 40K robots and saved more than 5 million working hours. Kevin Kroen - Partner, Intelligent Automation and Digital Upskilling Leader of PwC US shared his insights about the services of the company.
In our first year of using UiPath’s platform, we automated about five million hours of non-value-added work. We strongly believe that with the right approach RPA can transform any organization.
UiPath services satisfy the majority of users as the platform has 4.5 rating out of 5 on gartner.com. The score is based on 1,700+ reviews. 98% of reviewers ranked the business 5 or 4, while none of them ranked 1 or 2. Users give quite high rating for product capabilities and for service support. On g2.com the company has 4.6 rating out of 5. The rating is based on 5,000+ reviews as more than 99% of reviewers ranked 5 or 4. The high satisfaction of consumers help the company to increase revenues from large enterprises as the number of consumers with $100K ARR increased from 899 to 1,363 YoY. At the same time the number of consumers with $1 million+ ARR increased from 74 to 135 YoY. The total number of consumers increased from 7,830 to 9,630.
As a result the company achieved 62% ARR CAGR in recent 2-year period while the revenue recorded 65% CAGR.
Profitability
The company generates quite high gross profit margin which exceeded 80% level during the last 5 quarters. The EBITDA margin is currently better than in 2019 but it is in deep negative territory recording -52.2% result. Meanwhile the management was able to improve the operating cash flow level which is near 0% level.
The negative EBITDA margin is attributed to substantial expense on selling and marketing. In 2019 the management spent more than 140% of revenues on S&M activity while the number declined to 76.8% by Q3 2021. UiPath business model doesn't require too much marketing expense in long-term horizon thus we think that the margin will improve substantially in upcoming years. At the same time the management spends 30% of revenues on R&D activities which is intended to offer advanced solutions to consumers.
Valuation
Considering historic valuation of the stock since its IPO, we see the multiples are gradually declining. Currently the P/S TTM multiple is at 28.8 level, while since IPO average is 42.2. Price to Gross Profit ratio is at 35.2 level while the average is 50.8.
To calculate the relative value of the stock we have collected data of top 100 tech stocks and built a regression model. We have regressed P/S FWD multiples against forecasted 3-year revenue CAGRs and TTM gross margins. As a result we have a model with R square of 69.3% and F stat of 108.5. The outputs generated by the software yield implied P/S FWD ratio of 32.1 which indicates stock value of $54. So the growth pace and the TTM profitability indicate undervaluation.
To calculate the intrinsic value of the stock we have built a DCF model. First we calculate the WACC. To calculate beta coefficient we have regressed since IPO weekly price returns against S&P 500 (SPY) returns during the same period. As a result we have a beta of 1.7.
For equity risk premium we have used 4.53% level and for risk-free rate we have used 2% input. As a result we have a WACC of 9.67%.
For the upcoming decade we anticipate revenue CAGR of 35% while our 2031 EBITDA estimate is 35%. In our model we anticipate gradual improvement to 2031 EBITDA target.
As a result our model yields intrinsic value of $62.3 which is 40% higher than the current stock price.
For the upcoming decade we anticipate 50% share count dilution and for 2031 we anticipate Price to FCF ratio of 35. The estimates yield 15% annual return opportunity during the upcoming decade.
We have also conducted scenario analysis to asses expected returns based on different EBITDA and revenue growth estimates. As a result our model indicates that we can expect double digit returns even if the company achieves 30% revenue CAGR.
So our valuation models indicate that the stock value is quite attractive at current levels.
Conclusion
UiPath's business has substantial growth opportunity. Consumers can increase the efficiency of their working processes substantially using company services. The company has quite a large total addressable market where it can capture significant market share given its competitive advantages. According to researches, UiPath has leading position in its industry. Consumers are highly satisfied from the services of the company. Our valuation models indicate that the growth potential of the business is not reflected in the stock price and investors can anticipate strong double-digit returns in upcoming decade. Thus we assign Strong Buy rating to the stock.
This article was written by Growth Analyst.