UiPath has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 9.4% to $14.03 per share while the index has gained 7.3%.

We're swiping left on UiPath for now. Here are three reasons why you should be careful with PATH and a stock we'd rather own.

Why Is UiPath Not Exciting?

Started in 2005 in Romania as a tech outsourcing company, UiPath (NYSE: PATH) makes software that helps companies automate repetitive computer tasks.

1. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

UiPath’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

2. Operating Losses Sound the Alarms

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

UiPath’s expensive cost structure has contributed to an average operating margin of negative 12.8% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if UiPath reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.

3. Cash Flow Margin Set to Decline

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the next year, analysts predict UiPath’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 23.3% for the last 12 months will decrease to 21.3%.

Final Judgment

UiPath isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 5× forward price-to-sales (or $14.03 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward TransDigm, a dominant Aerospace business that has perfected its M&A strategy.

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