Today, we’re talking the UiPath IPO as this company goes public this week. I’ll share
some of the most important information about the company and the actual offering that will
hopefully be helpful to you in making the decision if investing in UiPath stock makes
sense for you. And as a bonus, I’ll also share some of my own thoughts as to what price
I think the stock could be reasonable to buy it at.
But first, I’m Kevin and we’ve been talking UiPath here and there for about 5 months now.
In fact, I put out a few videos on them in December, with the big one being the video
that previewed the 7 big companies I was looking to come out in early 2021 that I know a lot
of you watched, because it’s one of my most watched videos ever. Well, with Coinbase going
public last week, this makes UiPath the 7th and final company on the list to go public.
So I think we did pretty good job in our predictions with those 7 companies, as they all came out
in the first third of the year. Now the question is, is this a case of saving
the best for last? Well, we’re going to try to answer that. Not as a direct comparison
to the other 6 companies, as much as a look at how good the company looks on paper and
how that translates in a cooling off IPO market…as I’m sure a lot of you have noticed that
IPOs and SPACs aren’t on fire like they were for most of the past year. So to that
point, does investing in a UiPath IPO in mid-April 2021 make as much sense as investing in one,
say mid-January 2021? That’s a big question that we'll work through together and try to
answer. So as a very quick refresher, or for some
of you, maybe an introduction, UiPath is a company whose platform leverages artificial
intelligence to enable, what they call, “software robots” to perform a lot actions, similar
as to what a human would do when executing business processes. I have to say that every
time I hear the term ‘robots’ from UiPath, it completely makes me think of the traditional
idea of a robot…like Rosie from the Jetsons. I’m sure some of you don’t know what the
heck I’m talking about, so just keep in mind you might be a ‘little’ bit younger
than me. But obviously when they use the term robots, they mean the use of their software
and code working to log into applications, pull out information from documents, moving
folders, filling in forms, and updating information fields and databases. In their S-1 filing,
UiPath says that their robots’ ability to learn from and replicate workers’ steps
in executing business processes drives continuous improvements in operational efficiencies and
enables companies to deliver on key initiatives with greater speed and accuracy.
And this goes well with the company’s proclaimed mission to unlock human creativity and ingenuity
by enabling the fully automated enterprise and empowering workers through automation.
So if you think about your job, how many things do you do that are tedious and repetitive?
Basically, just plain boring? And how does that affect your job satisfaction? If you’re
like me, that’s the part of work I wish I could off-load to someone else…and that
in an essence, is what UiPath aims to do. And the idea is that employees could better
use their time and skill in a more effective and fulfilling way. All sounds really cool,
right? Now with that background being understood,
we still need to know if this sounds-cool, tech-AI-company makes sense as an investment.
So let’s dig a little further into their IPO filing and see how they run their business
and if they are winning over customers with the product they’re selling.
So as far as customers, UiPath claims that as of January 31, 2021, they had just under
8,000 total customers, including 80% of the Fortune 10 and 63% of the Fortune Global 500.
This was up from just over 6,000 customers a year ago earlier…so by my math, they increased
their customer base by about a third, or approximately 30-33%. Some of their current customers that
they listed in their filing are names you’re probably familiar with, big names like: Adobe,
Applied Materials, Chevron, Chipotle, CrowdStrike, CVS, and Uber Technologies.
So, so far, so good, right? Very solid list of customers. But the next thing to ask is,
do the customers that UiPath obtains…stick around and keep spending? I mean it’s important
to know if customers are sold on the idea, but then ultimately don’t see a return on
their investment and then leave. Well the company has a key metric of theirs
that looks at the ability to expand within their customer base, and they do this by looking
at a dollar-based net retention rate, which represents the rate of net expansion of annualized
renewal run-rate, which they call ARR for short, that then apply to their existing customers
over the last 12 months. At the end of the day, the metric lets them know if their customers
continue to spend more over time. Well the answer appears to be yes, as according their
S-1 filing, their dollar-based net retention rate was 153% in 2020 and slightly down, but
still an impressive 145% in 2021. And that still translated in actual ARR growth rate
of 65% year over year in dollars. Now let’s jump into the big financials;
the company generated revenue of almost $608 million in 2021, representing a growth rate
of 81% over 2020 revenue of $336 million. Impressively, they also reported a very significant
narrowing in their overall net loss, from $520 million in 2020, down to $92 million
in fiscal year 2021. Looking at the chart, you can see that expenses dropped in every
major area, including Sales and Marketing…and Research and Development. Sort of surprising
to see that amount of expenses being cut by a company that is growing so fast. Some of
the expenses, particularly on the sales and marketing side were likely as a result of
the pandemic….so something to keep an eye on going forward.
Speaking of looking forward, let’s take a look at the market outlook. IDC estimates
the market for Intelligent Process Automation had a value of $17 billion by the end of 2020
and is expected to grow at a compound annual growth rate of approximately 16% to $30 billion
by the end of 2024. Now UiPath actually believes the market to be more than double of that,
as they feel adoption will be quicker. So, I guess we’ll have to see how things evolve
going forward. As for competition for the robotic process
automation market, UiPath lists quite a few competitors, although mostly smaller companies.
But two names on the list will catch most people’s eye: the tech giant Microsoft being
the obvious one. But the one that’s a clearly more direct competitor is Automation Anywhere
who is backed by Softbank; unfortunately since Automation Anywhere isn’t public yet, we
can’t compare their revenues, customers, or subscription numbers.
Moving on, let’s take a look at their valuation, one of the more interesting aspects of this
IPO. Back on February 1st, UiPath Inc announced it had closed a $750 million Series F funding
round at a post-money valuation of $35 billion. That meant that their valuation more than
tripled from a Series E round of fund-raising last July, when the company was valued at
$10.2 billion. Ok, now this is where it gets interesting…when UiPath released their first
suggested pricing range in an amended S-1 filing, it came in at $43 to $50 for their
IPO. That would’ve actually suggested a lower valuation, closer to the mid-20 billion
dollar range. Needless to say, that’s not typical; a lower valuation would absolutely
not be expected. The question that immediately came to mind was, what changed from February
1st to now? Now obviously we don’t know what data the private investors were provided
during the series F funding round, but I would assume it would’ve been estimated fiscal
2021 data pretty similar to what came out in their public filing….I just wouldn’t
expect a huge difference that would’ve resulted in this type of drop in the valuation. But
the other thought, and for someone that has followed IPOs closely over the past year,
I felt that the timing of going public could be the big factor. So thinking about this
a little more, if UiPath made the announcement of their series F round on February 1st, then
the actual fundraising likely happened in January. And at that time, the IPO market
was still pretty hot. Think about Poshmark and Affirm coming out and trading way over
their IPO pricing...which by the way, they're nowhere near where they opened at right now.
So then, as we got into the middle of February, things started to take a turn for tech stocks,
IPOs, and SPACs. So looking at this from my perspective, it appears that UiPath and their
underwriters were taking this in when coming out with their initial pricing range. And
maybe starting with that conservative range just to see what the reaction was. Now as
of this recording, UiPath has upsized the IPO by about 2 and half million shares and
raised their anticipated pricing range, but not by a huge amount, as they're now expecting
their IPO shares to be sold between $52 and $54 dollars. But that still comes in at a
valuation only around the upper 20 billion dollar range, say approximately 28 billion
if the shares are priced at the top end of the range at $54... and that obviously is
still less than the $35 billion dollar valuation in February. Now before I get into my thoughts
on the company and at what price the shares might make sense to buy at, let’s go over
some other details of the offering. As for the date of the UiPath IPO, pricing
is expected this Tuesday with public trading then set to begin on Wednesday, April 21st.
UiPath Stock will trade under the ticker: PATH.
So keeping in mind that I’m not a financial advisor and am not providing any recommendation
as I’m only sharing my own thoughts…as I think about if investing in the company
makes sense from the perspective of what they do and the financial data they’ve reported,
I definitely think it’s a company that has a lot going for it, strong growth and customers
that stick with them. The elephant in the room and what I’m wondering is how this
IPO looks as of right now in the middle to end of April, as compared to when I first
talked about them in December when this IPO would be getting everyone’s attention. As
far as valuation…if the stock were to trade within the suggested range, I’m getting
a Price to Sales ratio of around 46 on trailing 12 month revenue that grew over 80% year over
year on a company with positive cash flow and a significant narrowing in its net loss.
So while not cheap, this stock is one I’m definitely interested in, particularly if
the rate of growth stays strong... and the market opportunity data suggests that it could.
And whereas last year as other companies doubled right out of the gate when they first started
trading, with this environment, where IPO interest has cooled and non-profitable technology
stocks have been hammered in some cases, maybe this is the time for a retail investor to
get a solid growing company without having to pay a crazy 100-150% premium when it starts
to trade…and I’m thinking of like what happened with stocks such as Snowflake and
Airbnb. And if UiPath stock is sold at a lower valuation at its IPO to where private investors
paid for it just a couple of months earlier, maybe this is the opportunity where the timing
is right to buy UiPath, where retail investors could get it at a fairer price.
Now prior to the cooling of the IPO market and tech in general, if I was an investor
completely sold on UiPath, but not willing to go overboard, I personally would’ve been
willing to pay up to $80 a share for UiPath stock. But with a different environment, the
one we’re dealing in now, I think would look to get it a lower price. I think if it
were available up to $67, you could convince yourself that while you weren’t getting
a steal, because it would still be pricey from valuation metrics, you could find ways
to justify paying that price, particularly if you think the tech sector was only taking
a short term breather. So that’s my take…what’s yours? Are
you buying into the UiPath IPO…and if so, what price are you looking at? Let me know
in the comments... I always enjoy hearing what everyone in the community thinks.
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