The way venture capitalists (VCs) look at business ventures depends on which stage they’re coming in at. American television show Shark Tank gives us a glimpse of what VCs look for in the earliest stages of a business – signs of traction, which usually comes in the form of revenues. “We did $700,000 in sales out of our living room in 8 months,” is the sort of response that you’ll see raise some shark eyebrows. Once VCs know someone will buy what you’re selling, they then want to know how large the opportunity is, usually referred to as total addressable market (TAM).
If people are lining up to buy what you’re selling and the TAM is giant, you may have a run-rate growth chart that looks like this.
That’s the sort of growth that gets VCs excited, even more so that it’s a Software-as-a–Service (SaaS) business model which commands a premium in the market. It’s that sort of growth that gives a startup lots of leverage in the funding relationship which can lead to overvaluations. That’s why when Upwork says they’ve filed for an IPO, we’re going to be really cautious about all the hype that might surround that offering. Just weeks ago, UiPath took in funding at a valuation of $35 billion which gives us somewhere to start.
Enterprise AI SaaS Offerings
We’ve written extensively about why robotic process automation (RPA) is something that companies need to adopt if they want to compete. In a nutshell, it’s about using AI to enable office workers to automate mundane tasks. If you’ve spent time in corporate America, you know that offices are full of roles which involve sifting through mundane tasks.
Enter RPA, where a small pilot project often leads to a company-wide deployment, because computers are so much better at mundane tasks than humans. The success stories seem almost too good to be true, except they are true, and that’s why we’re keen to get exposure to RPA, or general enterprise AI stocks for that matter. At the moment, there are at least a handful of companies with enterprise AI offerings. Here’s are some in order of size (we’re using UiPath’s last valuation of $35 billion as a proxy for market cap).
It’s likely that UiPath will begin trading at a valuation that’s higher than what they were last valued at two weeks ago – $35 billion – because today’s growth-hungry Robinhood weekday warrior doesn’t know what the word valuation means. (Investors in C3.ai are finding this out the hard way as shares have halved in the several months since IPO.)
When it comes to total addressable market (TAM), research firm IDC estimates the market for Intelligent Process Automation (another of the many terms used for RPA), is estimated to reach $17 billion this year growing at a four-year compound annual growth rate (CAGR) of approximately 16% to $30 billion by the end of 2024. And they’re only looking at RPA. There are plenty of other niches in the enterprise AI space that have barely scratched the surface. Here’s a look at revenue trends for some companies we follow that would be considered “enterprise AI stocks.”
There’s plenty of room for multiple players in the RPA space and/or enterprise AI space. The question is, how much of this future growth is already priced in? Since nobody actually cares come IPO time, we’re going to let the dust settle before making any investment decisions here. Today, we want to see if we can find any red flags in the UiPath S-1 filing.
A Look at the UiPath S-1
We always look for revenue concentration risk, and that’s not a problem for UiPath. Revenues are distributed nicely across nearly 8,000 customers, 12.5% of which are contributing more than six-figures a year. A 145% “net retention rate” means they’re able to upsell clients over time – the old land-and-expand strategy. It makes a lot of sense why they’re taking that approach.
Businesses are initially skeptical of RPA, so they sign on for a small pilot project. When the pilot is a resounding success, management takes notice, and spending increases on the vendor solution that saved them money. More success stories beget more boardroom wankathons about “working smarter, not harder,” and soon every department in the firm is clamoring to adopt the vendor’s solution. The proper term for this compounding effect is “flywheel,” and it’s always best accompanied by some graphical abomination such as this one:
If it wasn’t readily apparent, UiPath sells their solution through lots of channel partners, namely consultants who love talking about success journeys, citizen developers, and flywheels.
Whatever success journey UiPath is selling, everyone seems to be buying it. Reference customers include 80% of the Fortune 10 and 63% of the Fortune Global 500, spanning various industries and including names like Adobe, Applied Materials, Chevron, Chipotle, CrowdStrike, CVS Health, Deutsche Post, Ernest and Young (EY), Takeda Pharmaceuticals, and Uber. Regarding revenue concentration, no single customer or channel partner accounts for more than 10% of revenues:
As of January 31, 2021, we had 1,002 customers with ARR of $100,000 or more and 89 customers with ARR of $1.0 million or more, which accounted for 75% and 35% of our revenue, respectively, for the fiscal year then ended.
There aren’t many concerns we have over UiPath other than the valuation they’ll come tearing out of the gates at.
A Romanian Success Story
What Salesforce did for sales teams, UiPath does for operations teams that span just about every industry there is. They’re currently vying with Automation Anywhere for the title of “my blue dot is further right and higher than yours” on the Gartner Magic MBA Quadrant thingy which shows four companies leading the charge in the RPA space:
Like Hoia Baciu Forest, UiPath’s growth is nothing short of magical. The CEO’s letter talks about how 10 people in an apartment in Romania have created a truly global company with clients in 30 countries. Being one of the fastest growing enterprise software companies ever is a double-edged sword because now people expect that growth to continue, growth that becomes more difficult to achieve as one scales. (Instances where growth falls short of Wall Street’s lofty expectations are usually great buying opportunities.)
There’s another thing for tech investors to note here. Buried in UiPAth’s S-1 are numerous examples of just how impactful their solution is. We don’t need to read these out, because the success is spelled out in their astronomical growth. What we did take notice of was the success story that involved EY, a 270-000 person strong consulting firm that uses UiPath and sells UiPath. Here’s what UiPAth said about EY:
They used UiPath as an overlay on top of systems such as SAP in order to enhance usability, accelerate processing time, improve accuracy, and upskill employees in using automation technologies.
You don’t have to work in software engineering to find this hilarious. Just several years ago, EY was “recognized as a leader in SAP implementation services.” Here they are using SAP in their own firm, and having to make sense of it using UiPath. Perhaps SAP wasn’t the best solution to implement if you need to use UiPAth robots to make sense of it. EY will quickly argue “there’s room for both,” but the writing is on the wall for legacy firms like $148 billion enterprise software vendor SAP that have fallen behind the times with platforms that are both difficult to deploy and use. Nimble platforms like UiPath leverage modern technologies such as computer vision and machine learning to run circles around vendors who haven’t figured this stuff out yet.
In August of last year, we wrote about The Best Pure-Play Robotic Process Automation Stock. That decision took into account all available players at the time, which weren’t many. Today, we have one of the leading RPA firms out there going public, which means we need to make a decision. Do we continue to hold the RPA stock we’re holding now, or do we look to pivot into holding UiPAth? We’ll only be able to answer that question when the dust settles following the UiPath IPO.
Should the IPO go through as planned, shares of UiPAth will trade under the ticker PATH.
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