Equity Research

UiPath's Balance Sheet and Free Cash Flow is a Force to be Reckoned With

Phathom Research

Phathom Research

— 4 min read
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UiPath's Balance Sheet and Free Cash Flow is a Force to be Reckoned With
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TLDR: As a long-term investor, UiPath's strong financial position provides confidence in the company's ability to take advantage of the prolonged software sector selloff. A strong cash position allows the company to buy back large quantities of shares at cheap market prices thus returning value for shareholders. From a day-to-day operations standpoint, UiPath's share price is irrelevant as they have no need to raise money since they already have ample capital and free cash flow-generating business.

With UiPath short interest at an all-time high of 30%, the company's strong balance sheet and free cash flow provide a reliable cash stockpile to buy back shares and take advantage of current market dynamics that have caused their stock price (along with most of the software sector) to trade significantly cheaper.

The Initial Cash Windfall (History Lesson)

Timing is everything, especially when it comes to IPOs. UiPath could not have asked for a better market environment for their final private round (Series F) in February 2021 and their IPO, two months later, in April 2021. This was the peak of the market rally coming off of the COVID lows and tech stocks were trading at all-time highs.

UiPath benefitted from their Series F and IPO occurring at the peak of a bull rally.

The bull market allowed UiPath to command a higher market premium generating more cash than they otherwise would have. By selling shares for an average of $59 per share, UiPath was able to hit the ground running as a public company with $1.5B in cash.

PATH raised funds at an average of $59 per share in early 2021 generating ~$1.5B of cash for the company.

The PATH to Free Cash Flow

UiPath has not run large cash flow deficits since going public. During their first two years as a public company they ran slight deficits - partly aided by higher non-cash compensation (i.e., stock-based compensation). Over time, PATH's operating margins improved, and after a couple of years, they became free cash flow positive. This free cash flow inflection can be attributed to best-in-class gross customer retention rates (>95%), strong gross margins, and improved operating efficiency.

UiPath became FCF positive in FY '24 driven by continuous revenue growth and operating efficiency.

UiPath has managed to retain over a billion dollars in cash and equivalents with ZERO DEBT on their balance sheet every quarter since going public.

UiPath's balance sheet has been bolstered by a strong cash position.

The company has also been able to drastically reduce stock-based compensation (SBC) over the last couple years while maintaining strong free cash flow. This means less dilution for shareholders.

Stock-based compensation (SBC) as a % of revenue has continued to improve to all-time lows as of the most recent quarter.

Buybacks, Buybacks, Buybacks

You may be asking yourself, "what is UiPath doing with all of this cash"? There are essentially two ways that the company is deploying capital: acquisitions and share buybacks. UiPath has made two strategic acquisitions over the past couple of years (PeakAI and WorkFusion) that have strengthened their position in the market. However, the bulk of their capital deployments have been buybacks.

Free cash flow (blue bars) has been used to fund buybacks (green bars) taking advantage of low stock price (gray line).

Over the past two years, PATH's buybacks have more than offset SBC causing the overall share count to decrease over time. UiPath's share count reduction is accretive for shareholders as it increases EPS (i.e., each share becomes a larger piece of the pie).

UiPath's declining share count helps drive EPS growth.

No Way Out for the Shorts

While UiPath's fundamentals continue to improve, short interest has risen to an all-time high 30% reflecting a large market disconnect. The longer the stock price remains depressed, the longer UiPath will continue to carry out large buybacks putting even more pressure on shorts as the float decreases. For long-term shareholders, this is a blessing in disguise as PATH gets more bang for its buck repurchasing shares at low prices. In the meantime, UiPath's fundamentals are improving and seem to have reached an inflection point as seen in the chart below.

Short interest hit an all-time high of ~30% despite revenue growth rate and NRR improvement.

Disclosure / Disclaimer: This article represents independent opinions and findings of Phathom Research. It is provided for informational purposes only and does not constitute financial or investment advice. The author holds long positions in UiPath (NYSE:PATH) at the time of writing this article.

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