The world's reliance on technology and digital solutions is consistently increasing. This enduring demand for software solutions across various sectors, including business, healthcare, and entertainment, indicates a highly promising trajectory for the industry's advancement.
Against the promising backdrop, this article sheds light on the fundamentals of two strong software industry players, UiPath Inc. (PATH) and Vimeo, Inc. (VMEO), to assess which stock could be a more advantageous portfolio addition.
In an era marked by rapid technological advancement, individuals, businesses, and governments are swiftly integrating innovative solutions to fortify their operations. Anticipated to surge at a CAGR of 11.2%, the global business software market is expected to witness significant expansion, reaching $987.61 billion by the year 2028.
Moreover, as per Gartner’s latest forecast, in 2023 the global software spending is projected to achieve a year-on-year growth of 12.9%, reaching a sum of $916.24 billion. Additionally, the outlook for 2024 indicates a surge in global software spending to $1.04 trillion, showcasing a 13.8% year-on-year rise.
Furthermore, Software-as-a-Service (SaaS) is emerging as one of the fastest-growing segments in the software industry. The rising adoption of SaaS solutions for Customer Relationship Management (CRM) persists as businesses seek to reduce IT expenses and improve scalability.
As companies expand, there is a need for SaaS platforms that are tailored to business needs, capable of encoding corporate policies, processes, and rules. These platforms play a crucial role in enhancing communication, improving corporate efficiency, and exploring new market opportunities for revenue generation.
The anticipated growth of the SaaS global market is notable, with projections indicating the market will hit a staggering $1.02 trillion by 2032, growing at an impressive CAGR of 13.9% from 2023 to 2032.
Therefore, considering the industry’s robust growth prospects in the upcoming years, PATH and VMEO should benefit. In terms of price performance, PATH has soared 42.4% over the past month to close the last trading session at $24.67. Meanwhile, VMEO surged 12.2% during the same period to close the last trading session at $3.68.
However, to find out which one is a better pick, let us dig deeper into the fundamentals of these Software - SAAS stocks.
Recent Developments
On October 10, PATH unveiled its latest Artificial Intelligence (AI) features, including Autopilot™. Autopilot™ integrates generative AI, specialized AI, and automation to enable fast and easy work automation using natural language. This innovation allows users to transform paper documents into automation-powered applications with a single click, facilitating digital transformation.
These new AI features on the PATH Business Automation Platform promise efficient automation development, revealing untapped opportunities for process enhancement, all supported by enterprise-grade capabilities.
Conversely, on November 2, VMEO launched “Vimeo Marketing,” a comprehensive toolset for video hosting, editing, and distribution. This comprehensive solution is crafted to empower marketers in effectively engaging audiences and driving business growth through the influential medium of video.
Addressing the current landscape where video comprises approximately 80% of internet traffic, Vimeo Marketing equips organizations of all sizes with a complete set of video marketing tools, enabling marketers to enhance performance across multiple channels.
Recent Financial Results
PATH’s total revenue for the fiscal third quarter (ended October 31, 2023) increased 24% year-over-year to $325.92 million, while its gross profit grew 25.5% from the prior-year quarter to $276 million. However, during the same period, the company’s net loss amounted to $31.54 million and $0.06 per share. In addition, its operating loss stood at $55.82 million.
On the contrary, for the fiscal third quarter, which ended on September 30, 2023, VMEO’s revenue amounted to $106.25 million, while its gross profit rose marginally year-over-year to $84.45 million.
Moreover, the company’s net earnings amounted to $8.46 million and $0.05 per share versus a net loss of $21.42 million and $0.13 per share in its prior-year quarter, respectively. Also, VMEO’s operating income stood at $5.68 million compared to an operation loss of $22.88 million in the same period last year.
Past and Expected Financial Performance
PATH’s revenue has grown at a CAGR of 46.6% over the past three years. Street expects PATH’s EPS for the fiscal fourth quarter (ending January 2024) to register an increase of 3.6% year-over-year.
Conversely, VMEO’s revenue increased at a CAGR of 18% over the past three years. Analysts predict VMEO’s EPS for the fourth quarter (ending December 2023) to register a 71.1% year-over-year improvement.
Profitability
VMEO is more profitable, with a trailing-12-month asset turnover ratio of 0.69x, higher than PATH’s trailing-12-month asset turnover ratio of 0.46x. Additionally, VMEO’s trailing-12-month EBIT margin of 1.47% compares to PATH’s negative trailing-12-month EBIT margin of 17.41%.
Likewise, VMEO’s trailing-12-month net income margin of 2.04% compares to PATH’s negative trailing-12-month net income margin of 12.51%.
Valuation
In terms of forward EV/EBITDA, PATH is currently trading at 56.63x, 377.5% higher than VMEO, which is trading at 11.86x. Moreover, PATH’s forward Price/Sales multiple of 11.14 is 647.7% higher than VMEO’s 1.49. Additionally, PATH’s forward EV/Sales ratio of 9.77x is significantly higher than VMEO’s 0.82x
Thus, VMEO is more affordable.
POWR Ratings
PATH has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, VMEO has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. PATH’s D grade for Value is justified by its high valuation compared to the industry average. In terms of forward EV/Sales, PATH’s 9.77x is 258.5% higher than the industry average of 2.72x.
Conversely, VMEO has a B grade for Value, justified by its discounted valuation metrics. The stock’s forward EV/Sales multiple of 0.82x is 53.8% lower than the industry average of 1.79x.
Among the 23 stocks in the B-rated Software - SAAS industry, PATH is ranked #13, while VMEO is ranked #1.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view PATH ratings. Get all VMEO ratings here.
The Winner
Despite positive industry trends that could benefit both PATH and VMEO, a closer examination of their fundamentals suggests that VMEO is the preferred choice and therefore could be a solid portfolio addition. This preference is driven by VMEO's stable financial position, higher profitability and discounted valuation in contrast to PATH’s relatively weaker financial results, poor profitability, and elevated valuation compared to industry norms.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Software - SAAS industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
PATH shares were trading at $24.16 per share on Wednesday afternoon, down $0.51 (-2.07%). Year-to-date, PATH has gained 90.09%, versus a 20.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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