Time to Buy the Dip on UiPath Stock?

Last quarter was solid, but the path forward looks more tenuous.

Software-based robotics and automation platform UiPath (PATH -2.04%) just got clobbered. Investors have been neutral over its last two years navigating the bear market with a new CEO (which was initially a co-CEO situation with one of the co-founders).

But the bear market is over, and new methods of artificial intelligence (AI) have investors suddenly displeased with UiPath — or at least highly uncertain of what comes next. The stock fell nearly 35% immediately following the fiscal 2025 first-quarter update (for the three months ended April 30).

UiPath hasn’t been the only software business to take it on the chin. The game has changed, and companies need to spend to keep pace with the rapid innovation Nvidia has helped unlock. Is it time to buy the dip on UiPath stock?

Last quarter was good, but that’s not the problem

After two years leading UiPath, Rob Enslin is out as CEO. Co-founder Daniel Dines (who stepped into the full-time role of chief innovation officer at the start of 2024) is back in as the chief executive.

It seems pretty clear things have dramatically changed for UiPath. Enslin was brought in to help get UiPath to profitability (on an adjusted earnings and free-cash-flow basis), and a share repurchase program was announced under his watch ($22 million worth of stock was bought back last quarter). But with Dines taking over, this seems to signal UiPath now sees innovation once again as more important than profitability, at least for the time being.

The recently revised trajectory for the company’s financials are proof of this shift. Fiscal Q1 revenue increased 16% year over year to $335 million, at the high end of guidance provided three months ago. Adjusted operating income was $50 million, a bit shy of the $55 million management had forecast.

The problem, though, is the full-year outlook just got a sizable downgrade. At the outset of fiscal 2025, management guided for revenue of $1.555 billion to $1.560 billion. With the recent earnings release, UiPath revised its outlook downward to $1.405 billion to $1.410 billion, a nearly 10% reduction from the previous high end of guidance. Annualized recurring revenue (or ARR, an important growth metric for software-as-a-service companies) is expected to be up just 14% year over year at the end of fiscal 2025 (which wraps up Jan. 2025).

Perhaps even worse, as UiPath’s revenue slows, profit margins are now going in reverse. Previously, adjusted operating income was expected to be about $295 million, implying an adjusted operating margin of about 19%. Three months later, expected adjusted operating income for fiscal 2025 has been shaved down to just $145 million, or a margin of just 10%.

Don’t all “AI stocks” only go up?

Though UiPath’s software helps customers automate redundant tasks for employees (like data collection or filling out forms), not all AI is trending in this current economic environment.

Massive amounts of corporate budgets have pivoted toward investing in Nvidia’s accelerated computing systems. And along with those systems, Nvidia offers plenty of algorithms that help its customers build their own custom AI applications. Suddenly, out-of-the-box ready-to-use subscription software isn’t so en vogue.

Now, this isn’t to say UiPath’s software is being ditched. Remember, ARR should still rise this year. But growth is slowing, so it’s clear UiPath’s share of new corporate spending isn’t what it used to be.

Slowing revenue and decreasing profitability is exactly what investors don’t want to see right now. If a company like UiPath reports slowing revenue growth, as is the norm as a business gets larger, that’s fine. But there should be an accompanying increase in profit margins as the business matures. Margins suddenly contracting is an indicator that competitive forces (in this case, Nvidia and lots of new software providers building atop Nvidia’s platform) are eroding UiPath’s business.

A few months ago, I was feeling good about buying more UiPath stock based on its outlook for rising profit margins, but the story has changed. I’ll be monitoring this one very closely, and critically, as it could be time to pivot to other software stocks with stronger competitive advantages.

Nicholas Rossolillo and his clients have positions in Nvidia and UiPath. The Motley Fool has positions in and recommends Nvidia and UiPath. The Motley Fool has a disclosure policy.

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