UiPath plunges as CEO resigns Is it time to buy the dip?

stock Ui Pass (road 1.57%) The robotic process artificial intelligence (AI) automation software company tumbled after its CEO resigned following the company’s disappointing guidance announcement.

A string of bad news is causing some investors to reevaluate their investment thesis for this AI stock. Let’s take a look at UiPath’s recent performance, leadership changes, and whether it’s time to buy the stock.

a miserable prospect

In the first quarter, UiPath’s revenue rose 16% year over year to $335 million, slightly ahead of analysts’ expectations. Annual renewal execution rate (AAR) increased 21% year over year to $1.51 billion, a key metric for UiPath.

The company defines ARR as the annual billing amount for subscription licenses as well as maintenance and support obligations. ARR does not include charges related to perpetual licenses or professional services. Basically, ARR is similar to what most companies call reservations. UiPath executives argue that although the length of the contract affects the numbers, it is a good predictor of future revenue. “(ARR) demonstrates our ability to acquire new subscription customers and maintain and expand relationships with existing subscription customers,” management explains in the earnings call.

Net retention in dollar terms was 118%, once again demonstrating solid growth within our customer base. The quarter ended with 10,800 customers, down 30 from the fourth quarter. The company said it continues to see declines among its smaller customers. The total retention rate was 98%.

The number of customers with ARR of $100,000 or more increased by 38 in the fourth quarter to 2,092, while the number of customers with ARR of $1 million or more remained at 288 quarter-over-quarter. Meanwhile, the company said it added a record number of customers, with ARR reaching $5 million.

Going forward, UiPath said it expects sales cycles to lengthen as deal vetting from prospects increases and large, multi-year deals become the preferred option. This also means that revenue recognition accounting rules can have a much greater impact on revenue growth than ARR growth. The issue of how revenue is recognized is one that other software companies have had to deal with, including: Veeva Systems.

For the second quarter, the company expects revenue in the range of $300 million to $305 million, well below the $340 million analysts expected. ARR was expected to be between $1.543 billion and $1.548 billion.

For fiscal 2025, UiPath forecast revenue in the range of $1.45 billion to $1.41 billion, well below the analyst consensus of $1.56 billion. We are looking for an ARR between $1.66 billion and $1.665 billion.

The company announced along with its earnings report that CEO Rob Enslin would step down and founder Daniel Dines would take back the helm of the company. Dines has served as UiPath’s Chief Innovation Officer.

The most recent quarter was decent, but it showed once again that while the company is doing well in expanding business with existing customers, it continues to struggle to add new customers. This quarter marked a reversal of the recent acceleration in sales growth and management’s outlook was very poor.

The company said the macroeconomic environment influenced its guidance, but also acknowledged some errors, including its compensation structure for its sales force. It said it would seek to address these issues by becoming more customer-centric and seeking to innovate with its customers.

We also plan to continue leveraging partnerships to drive customer growth. However, it is disappointing that the partnership has not yet resulted in additional net customers.

Image source: Getty Images.

Is it time to buy a dip?

When a company changes leadership in the face of growth problems like UiPath, the smartest thing to do is to reset expectations to a very low level. That’s because in the short and medium term, stocks are often driven by expectations. Shareholders will feel the pain in the immediate aftermath, but setting a low bar and exceeding it in the following years will often lead to a nice bounce in the stock price.

Considering the company’s still solid net dollar holdings, there’s good reason to believe this is what the company did.

Meanwhile, from a valuation perspective, UiPath’s forward price-to-sales ratio is 4.5. Some estimates have likely not been updated yet, which could push the P/S closer to 4.8. Either way, this is an incredibly cheap valuation for a high-margin software company with a strong balance sheet and cash generation.

After taking out $1.9 billion in cash and marketable securities, the stock trades at an enterprise value-to-forward sales ratio of less than 3.5 based on current earnings guidance.

PATH PS ratio (anterior); Data from YCharts.

Currently, UiPath is thrown into the bargain bin, and if the company can beat reset expectations, the stock could see a lot of upside from here next year. There appears to be some low-hanging fruit the new CEO can pick to improve performance, including improving incentives for the sales force.

But in the long term, companies need to show that AI is a tailwind for their business, not a potential disruptor. The new CEO has been involved in the innovation part of the business and will need to execute in this area.

Given the valuation and low bar, I would buy the stock on this dip.