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UiPath (NYSE:PATH) is a $ 25.79 billion tech stock that’s draining its cash flow and appears to be having issues with its top-line growth. This means that the company may find it difficult to maintain this high valuation. As a result, the stock of PATH is likely to continue to decline.
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In fact, since peaking at $ 85 on May 26, the stock has fallen to $ 51.72 on October 19. This represents a drop of 39.2% over the past 5 months.
There is a possibility that PATH’s stock will continue to fall if UiPath cannot become profitable or produce positive Free Cash Flow (FCF). Based on my analysis, this is unlikely to happen anytime soon. So look below, PATH stock could continue to fall, especially if its next quarterly results show the same.
Where is it with UiPath
UiPath is an automation platform software company that offers a range of robotic process automation (RPA) solutions to its corporate customers. The problem is that income growth has slowed.
During its last quarter, the company made $ 195.5 million in sales. But it was only 5% more than the previous quarter $ 186.2 million in revenue. On an annualized basis, this equates to only 21.55% on an annualized basis.
This may not be enough to pull the company to profitability over the next four quarters. For example, in the last quarter, the company incurred an operating loss of $ 97.8 million.
This implies that sales would have to be 50% higher before the business becomes profitable. So if sales only increase 22% per year, it could take over 2 years to achieve.
Additionally, in the past six months, UiPath has spent nearly $ 28 million in free cash flow. This can be seen on the company’s cash flow statement on page seven of his latest 10-Q filing.
For example, it shows that UiPath lost $ 23.523 million in operating cash flow losses in the past six months through June 30. On top of that, the company spent $ 3.641 million in capital expenditures and $ 0.771 million in capitalized software costs. All of these add up to $ 27.935 million in negative free cash flow.
This means that the capital expenditure could reach $ 56 or more per year. This will eventually lower the cash balance unless the company issues more stock, thereby diluting existing shareholders. He could also borrow money to finance these losses. But neither of the latter two options are likely to happen, as the company has $ 1.826 billion in cash. He will probably only withdraw the money.
Where it leaves the path for action
Consuming cash will not put the business at risk of needing much more cash, as its cash balance can last for a long time. However, analysts and the market still don’t like to see losses and negative cash flow.
The problem is that its license revenues, the largest part of the company’s overall revenues, are declining. Like a In search of the alpha the analyst shows in his article, it has fallen 19.32% and 4.66% in the last two successive quarters.
Even with this decline, license revenue was still 48.9%, almost half of total revenue. For example, license revenue for the last quarter was $ 95.547 million compared to total sales of $ 195.521 million.
This implies that the company is struggling to keep its existing customers and renew them. The company is therefore increasingly dependent on sales from new customers. This is both costly (hence the losses) and requires long delays.
As a result, the market will likely end up lowering the value of the stock in terms of multiple price / sell (P / S). For example, according to In search of the alpha PATH stock trades for 30 times sales until the year ending January 2022, and 22.8 times the following year.
It is just too high. The market is likely to reduce this multiple by at least a third over the next year if license renewal revenues do not pick up significantly.
What to do with PATH Stock
This implies that the PATH stock is not worth more than 20 times the sales until the year ending January 2, 22, which is only $ 17.479 billion (i.e. 20 x $ 873.98 million ). What’s more, 14.67 times forecast 2023 sales of $ 1.17 billion is $ 17.158 billion. The average target market value is therefore $ 17.319 billion.
Since UiPATH now has a market value of $ 26.56 billion, according to Yahoo! Finance, this represents a potential drop of 34.8% from its current price.
This results in a target price of $ 33.72 per share (i.e. 0.652 times the current price of $ 51.72). This means that shareholders and investors can expect a further decline in PATH shares. Plus, it could be more if the business produces another quarter of FCF’s bottom line and losses. Most value investors will likely stay away from this losing stock.
As of publication date, Mark R. Hake did not hold (directly or indirectly) any position in the securities mentioned in this article. The views expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
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