UiPath: A Golden Opportunity in AI-Driven Workflow Automation

Key Points

• UiPath's beat-and-raise quarter led analysts to raise their price targets and begin a multi-year upgrade cycle. 
• The company is on track to accelerate growth and outperform the consensus estimates for 2025. 
• Strength is driven by the need to automate, as seen in the double-digit recurring revenue gain and 113% retention rate. 

UiPath NYSE: PATH is well-positioned to benefit from AI and workflow automation now and over the long term. Its own results and results from other AI automation names like SoundHound NASDAQ: SOUN reveal increasing interest and use-case applications that are revolutionizing how businesses operate. UiPath’s latest advancement is focused on Agentic AI solutions. 

Agentic AI incorporates UiPath robots into an interconnected network, including AI, people, bots, and generative tools to maximize workflow across enterprises in a scalable fashion. The system provides ample developer tools for customization, allowing for highly differentiated use cases across industries and sectors. This is important because AI automation and services spending, in the earliest stages of a multi-year upcycle, will outpace infrastructure significantly and become the tech industry's largest segment over time.

UiPath Confirms Support; Higher Prices Are Indicated

The price action in UiPath stock was mixed following the FQ3 earnings release but ultimately bullish for the market. The report sparked volatility but confirmed support at a cluster of significant moving averages that show speculators, traders, and investor sentiment coming into alignment. Highlights from the report include high-single-digit growth, outperformance, and margin strength. The results were driven by an increased client count and penetration, with ARR up 17% year-over-year, net new ARR up 3.6% for the quarter, and the net retention rate at 113%. 

Margin news was also good. The company leveraged its topline strength to produce better-than-expected results despite headwinds. The adjusted gross margin contracted by 200 basis points but less than the analysts' consensus reported by MarketBeat, and the operating margin was strong. This resulted in a 13.6% increase in adjusted operating income and 5700 basis points of outperformance in adjusted EPS. 

The company's cash flow was negative for the quarter as R&D, investment, and marketing continued to erode cash flow. However, the company is also well-capitalized, with a fortress balance sheet that can sustain operations until profitability improves. Balance sheet highlights include decreased cash and assets, decreased liability, and reduced equity offset by a 0.5x total leverage-to-equity ratio and a net cash position. 

Analysts Sentiment Firms; The Market Winds Shift for UiPath

Analysts' sentiment downgrades and price target reductions weighed on UiPath’s stock price in early 2024, but a shift occurred following the Q3 release, turning the headwind into a tailwind. The shift includes a half dozen analyst revisions, including two reiterated price targets and four increases. The four increases align with the reiterated target and broader consensus, putting the stock in the $16 to $18 range or about 15% upside from critical support at the high end. This shift is significant because it adds lift to the market and will become a sustained upgrade cycle in 2025 if the company sustains momentum. In that scenario, the market will complete a reversal and could advance 50% to 60% by the year’s end. 

The technical outlook for UiPath stock is bullish. The market is moving higher within a range, crossing above a critical target at the middle of the range, and shows support at a cluster of moving averages. The moving averages are noteworthy because they form a Golden Crossover and signal a market sentiment shift that aligns with the analysts' shift. The move above $15.50 opens the door to a more significant movement that could take this market to the range top near $18.25. The top of the range may cap gains because it is at the top of an open price gap, but the impact may be limited. 

The institutions pose a risk to the outlook. They own more than 60% of the stock and have been selling on balance in Q4. If this persists, it is unlikely that UiPath will be able to move to the top of its range, much less to new highs.