Ui Pass (New York Stock Exchange:Path) The outlook for fiscal 2025 was very poor, shocking investors. And just to be clear, I was bullish on PATH when I wrote this earnings report.
But I know from experience. It makes no sense to mix one bad investment decision due to cost bias with another bad investment decision.
In fact, I believe the only way to outperform the market is to honestly recognize your mistakes. Everyone makes investment decisions. However, amateurs blame others, and professionals blame themselves and try to correct and make up for their wrong decisions.
PATH’s current price, including a 30% pre-market selling ratio, is valued at 50 times future operating profit. A completely unfair premium for what it offers to investors.
A quick summary
In a previous article I said this:
(…) After a rough few years, UiPath is changing its outlook, and its stock is attractively valued for now.
Author’s work on PATH
In retrospect, this turned out to be false. UiPath was able to put together a compelling narrative and convince many notable investors of UiPath’s strong market position. But unfortunately, aside from the fascinating story, there wasn’t enough to support its value.
UiPath’s Short-Term Outlook
UiPath creates software that helps businesses automate repetitive tasks. That’s the pitch.
Think of it as a digital assistant that can handle routine tasks like data entry. UiPath’s software, often referred to as “robots” or “bots,” can perform these routine tasks quickly and accurately. This helps our customers save time, reduce errors, and free our employees to focus on more important tasks.
Now, beyond the story, the reality is slightly less glamorous. The departure of UiPath CEO Rob Enslin brings untimely uncertainty at this critical time.
UiPath also described a challenging environment, particularly impacting its mid-market customers, with slow rates of deal closing and increased scrutiny of multi-year contracts.
The outlook has changed significantly compared to 90 days ago due to inconsistent execution, including contractual issues and sales compensation changes.
So, with this context in mind, let’s now look at the financials.
UiPath’s instructions come as a negative surprise
PATH Revenue Growth
A lot can be forgiven for a growing company. In fact, if the company continues to achieve solid growth, a lot of colorful stories from the CEO can be acceptable. Fundamentally, a growth company must deliver strong growth.
The last thing a growing company should do, under any circumstances, is withdraw guidance. Dear reader, this is one of the greatest unforgivable sins. And that’s exactly what UiPath is guilty of.
Moreover, what would it take to revise the company’s full-year guidance downward by more than approximately 1,000 basis points from the midpoint of the range just 90 days after the previous result? Hell, that just leads to a complete and utter loss of faith in the company’s colorful story. And with that comes a premium that investors are willing to pay.
PATH stock valuation – 50x non-GAAP operating income
Including the 30% pre-market drawdown, PATH is priced at 50 times future operating earnings.
For some time now, the paper has been one of the companies that could be expected to reaccelerate its top line along with a sharp improvement in profitability.
More specifically, UiPath planned to increase its non-GAAP operating income from $233 million last year to about $300 million this fiscal year. And now?
Now, not only is profitability not expected to increase at all, but profitability is actually expected to decline by 35% year over year.
In this context, are investors really likely to pay 50 times non-GAAP operating income? Obviously not.
conclusion
Bottom line, UiPath has sent investors wild with its bleak outlook for fiscal 2025, resulting in significant pre-market selling and raising serious doubts about its valuation.
Initially, the potential of UiPath’s automation solutions convinced many prominent investors of UiPath’s potential. But the CEO’s resignation and a difficult economic environment exposed cracks in the narrative, slowing the pace of deal closing and leading to inconsistent execution.
Just 90 days after its previous forecast, the company significantly revised its full-year guidance, shattering investor confidence and highlighting a cardinal sin for growth companies: guidance withdrawals.
As investors reassess the company’s 50x forward operating earnings valuation, it’s become clear that UiPath’s once compelling story has deteriorated further. After all, in the harsh world of investing, failing to achieve growth is a sin too great to forgive.
