Robotic software start UiPath (NYSE: PATH) debuted in the market in 2021 to much fanfare. The company was growing sales at a breakneck pace, and its tools that help automate redundant tasks have a lot of potential as organizations look for ways to increase the efficiency of their employees. But the market has turned against UiPath and shares have fallen 73% since becoming available for public trading.

This does not, however, diminish the company’s long-term prospects. Business continues to grow at a brisk pace and UiPath has plenty of cash to help it maximize its potential. It is a position that a very young Microsoft (NASDAQ: MSFT) found itself in the late 1980s after its initial public offering (IPO). Could UiPath turn things around and become a software titan?

Solutions for a highly competitive job market

UiPath makes robotic products based on software, a niche within computing called robotic process automation (RPA). Software is a fantastic tool for increasing efficiency in the workplace, and RPA in particular helps automate redundant tasks — things like filling out forms with basic information and collecting and organizing data.

UiPath thinks its total addressable market is worth around $60 billion a year and growing, and researchers like Gartner (NYSE: IT) often name UiPath and its private counterpart Automation Anywhere as the two main players in this space.

It certainly doesn’t come early in the computer technology part, like Microsoft did in the 1980s, but UiPath has an offering that could prove very timely over the next decade. Cloud computing and artificial intelligence are helping many organizations find solutions to an IT staff shortage, and automating redundant tasks can free up time for other activities.

Although the macroeconomic environment has changed in recent months (tighter monetary policy by the Federal Reserve in an attempt to curb inflation, Russia’s war against Ukraine, etc.), CEO Daniel Dines believes that demand for longer term RPA did not decrease.

UiPath projects annualized recurring revenue (ARR) of at least $1.22 billion by the end of the current fiscal year (ending January 2023), which represents a 32% increase over the previous year. ARR at the end of January 2022. By comparison, ARR was up 59% year-over-year in the last quarter of last year. A slowdown in growth is underway, but the aforementioned economic conditions in Europe where UiPath is based are a major reason for this.

In addition to its rapid growth, UiPath generates gross profit margins in excess of 80% and had $1.68 billion of cash and short-term investments on its balance sheet and zero debt at the end of the month. April 2022. UiPath’s solutions meet many different needs. industries, it is growing at a rapid pace and it has the financial flexibility to adapt and invest in new capabilities over time. It has all the makings of a fantastic software stock, much like Microsoft did in 1986.

The glaring problem for UiPath right now

The world of tech start-ups has changed a lot over the decades, and there’s a big difference (at least financially) between UiPath now and where Microsoft was at the start of its history: profitability. When Microsoft completed its IPO in 1986, it was generating a positive net profit.

UiPath, on the other hand, generated a net loss of $408 million in the last 12 months. Free movement of capitalwhich excludes non-cash expenses such as amortization of intangible assets and employee stock-based compensation, was negative $110 million.

This is (at least in part) by design, as many tech companies forgo profit making to maximize R&D and marketing spend. However, loss-generating stocks are out of fashion right now given the current economic situation and the Fed’s aggressive interest rate hikes (higher rates particularly affect higher-growth companies expecting to start making profits later).

Stock-based compensation paid to employees was $101 million in the first quarter alone, or more than 40% of revenue. While that’s not unusual for a fast-growing tech company emerging from a recent IPO, it’s nonetheless a number that should moderate quickly to keep the company on a sustainable expansion path. .

Problems like this are solved by cost-cutting efforts (UiPath said it was cutting its workforce by up to 5% at the end of June, which isn’t exactly good news for anyone), but it It remains to be seen how profitable UiPath can be.

The good news is that some of these issues (slowing growth and an uncertain earnings outlook for the next two years) are now factored into this headline. The shares are trading at 10 times sales over the past 12 months, still a premium that anticipates rapid growth, but not the exorbitant valuation the company achieved more than a year ago.

UiPath could turn into a dominant player in the enterprise software industry, but that story is going to take many years to develop. If you decide to invest, keep any position a very small percentage of your overall portfolio.

10 stocks we like better than UiPath Inc.
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

They have just revealed what they believe to be the ten best stocks for investors to buy now…and UiPath Inc. wasn’t one of them! That’s right – they think these 10 stocks are even better buys.

View all 10 stocks

* Portfolio Advisor Returns as of June 2, 2022

Nicholas Rossolillo has positions in UiPath Inc. Its clients may have positions in the stocks mentioned. The Motley Fool holds positions and recommends Microsoft and UiPath Inc. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.