February 28, 2024

Daniel Dines, Co-Founder and CEO of UiPath


UiPath’s New York Stock Exchange debut, scheduled for Wednesday, marks one of the largest software IPOs in US history and is the most hyped first trade for cloud investors since Snowflake’s IPO in September.

However, the company, whose software helps companies automate office tasks, is grappling with mounting investor concerns about frothy valuations and a market rotation away from high-growth technology.

In recent years, the cloud has been an unavoidable bet. From Zoom’s soaring popularity after its IPO in 2019 and Shopify’s growth in e-commerce, to the rising demand for cloud security tools sold by Zscaler and CrowdStrike, investors now have an extensive list of large-cap names for your portfolio.

In 2020, the WisdomTree Cloud Computing Fund, which consists of 58 publicly traded cloud software providers, more than doubled, while the Nasdaq rose 44% and the Dow Jones Industrial Average rose just 7.2%

On the way to UiPath’s initial public offering, the trend has changed noticeably as investors look to stocks that have a perceived advantage should interest rates continue to rise. The cloud index is down more than 7% this year, while the Dow is up over 10%, outperforming other major US benchmarks.

Cloud stocks have underperformed this year


Longbow Asset Management CEO Jake Dollarhide said that while sentiment remains bullish on cloud stocks over the long term, sentiment has undoubtedly deteriorated. Part of that has to do with the reopening of the economy and uncertainty about whether companies will be withdrawing their cloud spending when they return to the office. There’s also a sense of market saturation among investors because so many cloud providers have gone public lately, he said.

“The cloud pandemic was like a Tesla – it was new and hot,” said Dollarhide. “After the pandemic, it’s like Model T. It’s become so ubiquitous.”

UiPath is based entirely on its financial metrics and hits the market at the right time. Revenue increased 81% to $ 607.6 million last year, and the company’s loss decreased from $ 519.9 million in 2019 to $ 92.4 million. The company’s gross margin of 89% is staggering even for software.

However, UiPath’s updated IPO price range this week of $ 52 to $ 54 per share values ​​the company at around $ 28 billion, down from $ 62.28 per share, or a valuation of $ 35 billion Equivalent to dollars in a round of financing in early February.

The stock could still open well above this level. UiPath may have kept the price range low to show growing excitement by increasing the asking price, and bankers may be taking a conservative approach to leave room for a stock pop.

Even when the price is $ 54, UiPath is staring at a steep multiple compared to almost all of its competitors. At that price, the stock would trade for about 50 times annual sales, which is second only to Snowflake among cloud stocks and about double the zoom.

It would also be a mammoth offer that raises $ 1.48 billion, assuming the underwriters buy their allotted shares. According to FactSet, only two corporate software IPOs in the US have ever crossed that mark, and both have occurred in the past seven months. Cloud database provider Snowflake was the largest, raising $ 3.9 billion in September, followed by Qualtrics, which raised $ 1.78 billion in January after being spun off from SAP.

“Snowflake was the most positive perfect story for me,” said Dollarhide, adding that he does not own the stock. “It came out at the right time. It was just a nice investment if you were lucky enough to get in on the first floor.”

Snowflake more than doubled to $ 253.93 on its first day of trading. Since Tuesday it is down 12% to $ 223.09. Across the WisdomTree cloud index, the average price-performance ratio fell from 15 in December to 13.2 by the end of March, after nearly doubling year over year.

“Best in Class” retention rate

UiPath was founded in Romania in 2005 and is headquartered in New York. The technology is known as “robotic process automation”. The company’s software robots are designed to automate repetitive tasks across industries such as healthcare, manufacturing, and energy, as well as across departments, including finance, human resources, and legal.

UiPath’s attractiveness to investors depends on its ability to prevent customers from coming back and spending more money, so sales grow quickly while costs (as a percentage of sales) decrease.

Last fiscal year, UiPath reported a net revenue tie of 145%, meaning the average existing customer increased spending 45% year over year. Jon Ma, co-founder of Public Comps, called UiPath’s retention rate “best in class” and the third highest of any public subscription software company. In an “IPO teardown” published last month Ma wrote that “Companies continue to add UiPath bots and automate more processes”.

UiPath, ranked 50th on CNBC’s 2020 Disruptor 50 list, stated in its prospectus that the number of customers spending $ 1 million or more in annual sales rose from 43 last year to 89 and in Last year rose to 21.

Subscription software companies call it a “land and expand” strategy that allows companies to start with a trial and then buy a limited amount with the idea that some will eventually become power users. Thomas Hansen, UiPath’s chief revenue officer, said on the online roadshow that UiPath is helping customers see value “in a matter of days or weeks.”

“Regardless of how big or how small a customer starts, the time from this original country to expansion often goes very, very quickly.” Said Hansen.

CLOCK: We are in a top market that will correct itself, says investor Jason Calacanis