Transcription
UiPath stock is down more than 83% from its high, and in this video, I'm going to make my case for why I think this is an undervalued growth stock you can buy before 2025. I'm going to share with you the company's revenue growth, the improvements in cash flow, and operating profit margins. I'll also discuss what Wall Street thinks about this company's free cash flow prospects over the next several years. Finally, I'll share the valuation differences that lead me to believe this is an undervalued growth stock, including my discounted cash flow valuation, which demonstrates a significant difference between the current market price and what I think is a fair price for UiPath stock. I'm going to do all this in this short video, so let's get right into it.
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So, the stock price is down over 83% from the highs reached in 2022. The big declines came early in the year when there was an abrupt change in leadership at the top. I'm not usually a fan of companies that have changes in leadership, especially abrupt changes. However, the good thing about this change is that the founder is taking over as CEO again. The founder was the CEO earlier, then they brought on a new CEO who was ousted earlier in 2024, and now the founder has retaken the helm as CEO. So, if there has to be a transition at the top, at least the founder is back in charge.
The company's revenue growth has been slowing considerably since 2021. In the most recent quarter, it generated revenue growth of 8.9%, but its latest products are catching on. Remember, UiPath generates revenue by offering enterprises improvements in their processes, especially in repetitive tasks that businesses have to do manually. If you can automate those processes, it saves a company significant sums of money, improves operations, reduces errors, and so forth. UiPath is seeing great demand for those products nowadays.
UiPath is incorporating artificial intelligence along with those automated services, and enterprises are really looking to UiPath now, especially because labor shortages and increasing wages are driving more businesses to seek these products and services.
More impressive than its revenue growth has been the improvement in cash flow. We could see this in late 2022. I've been talking about many tech companies doing the same thing, where for years, tech companies were not very interested in improving fundamental metrics like cash flow and profits; they were more focused on growth at all costs. But when the Federal Reserve and central banks worldwide started increasing interest rates to fight inflation, the cost of capital increased. When the cost of capital increases, investors push companies to focus on efficiency, not just growth. UiPath was one of those companies that made a big shift to focus on efficiency and cost control, and those efforts are paying off.
You can see the big change here: cash flow from operations was going in the opposite direction, becoming more and more negative, but then they made those cost-cutting efforts that really improved operations. You can see that improvement all the way up to 23% from -2% in late 2022. A similar story applies to its operating profit margin. The company made changes in 2022 that started to improve the operating margin, moving from getting worse and more negative to improving and getting closer to profitability on the bottom line—-12.83%, a big improvement from negative 60% in the same time in 2022.
Now that we've looked at the fundamental prospects and historical financial metrics, let's look at valuation. When measured by the forward price-to-earnings ratio, UiPath stock looks relatively cheap at a forward PE of 27. This is near the lowest you’ve been able to buy this stock, with the lowest being closer to a forward PE of roughly 22. I don't expect this stock will approach those valuations again unless there's a significant drop in the company's performance on revenue and reversals in cash flow improvement and operating margin, which does not seem likely.
If you recall, I did a video when the company gave its outlook for this upcoming fiscal year. Management said that it expects cash flow from operations to accelerate in 2025. So, management expects improvements in cash flow, not declines. In fact, Wall Street also expects improvement in UiPath's free cash flow over the next five years, starting in 2025, where they expect free cash flow to improve from $290 million to $320 million, and then all the way up to $540 million by 2029.
Now, this isn't explosive growth, but it's steady and solid growth for UiPath's free cash flow expectations over the next five years. I shared with you the undervaluation when measuring by the forward price-to-earnings ratio, but that's only one way to value a business. Another way I value a business is by doing a discounted cash flow model, which gives me an intrinsic value per share or a price per share that I feel is what the stock is worth today. This calculation for UiPath gave me a price per share of $20.54, while the current market price is $13.91. So, my intrinsic value calculation also shows me that the stock is undervalued.
Whether I look at it from the forward price-to-earnings multiple or from the discounted valuation, both point me in the same direction: the shares are undervalued. Of course, that doesn't guarantee that the share price will approach my intrinsic value calculation. However, these are estimates and assumptions I make to give me an idea of what the business is worth and what I'm willing to pay for it. These calculations show me that UiPath stock is undervalued.
For all these reasons, investors looking for stocks to add to their portfolio in 2025 should consider UiPath, especially as it bridges the crossroads between automation and artificial intelligence—something that enterprises are clamoring for in 2024, and I expect them to continue doing so in 2025. Labor shortages are not going to improve in 2025, and the cost of labor is not going to improve either; it's going to increase the desire for companies to look to automation and artificial intelligence to keep costs under control.
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