The UiPath IPO will raise nearly $ 1.5 billion as stocks in the cloud recede

The debut of UiPath on the New York Stock Exchange, scheduled for Wednesday, will mark one of the largest software IPOs in US history and will be the most promoted transaction for cloud investors since Snowflake went public in September.

But the company, whose software helps businesses automate office tasks, has to contend with growing investor concern about foamy valuations and a market rotation away from high-growth technology.

In recent years, the cloud has been an unmissable bet. From the growing popularity of Zoom after the 2019 IPO and the rise of Shopify in e-commerce, to the growing demand for cloud security tools sold by Zscaler and CrowdStrike, investors now have an extensive list of high-capacity names for their portfolio.

In 2020, the WisdomTree Cloud Computing Fund, made up of 58 publicly traded cloud software vendors, doubled more, while the Nasdaq rose 44% and the Dow Jones industrial average gained just 7.2%

Moving on to the UiPath IPO, there has been a noticeable change in the trend as investors move to stocks that have a perceived advantage if interest rates continue to rise. The cloud index fell more than 7% this year, while the Dow rose more than 10%, surpassing other major US benchmarks.

Jake Dollarhide, CEO of Longbow Asset Management, said that while it remains a long-term rising cloud stock, sentiment has no doubt worsened. Part of this, he said, has to do with the reopening of the economy and uncertainty about whether businesses will withdraw their spending in the cloud when they return to office. There is also a sense of market saturation among investors because so many cloud providers have gone public recently, he said.

“The pre-cloud pandemic was like a Tesla – it was new and hot,” Dollarhide said. “Coming out of the pandemic, it’s like model T. It’s become so ubiquitous.”

Based exclusively on its financial values, UiPath enters the market at the right time. Revenues increased 81% last year to $ 607.6 million, and the company’s losses fell to $ 92.4 million from $ 519.9 million in 2019. The company’s gross margin of 89% draws attention even to software.

However, UiPath’s updated IPO price range this week, between $ 52 and $ 54 per share, values ​​the company at around $ 28 billion, down from $ 62.28 per share, or an estimate of $ 35 billion in a round of funding in early February.

The stock could still open well above this level. UiPath may have set the price range low to show growing enthusiasm by raising the price of its offering, and bankers could take a conservative approach to make room for stock growth.

Even though the price is $ 54, UiPath looks at a steep multiple compared to almost all of its colleagues. At that price, the stock would trade about 50 times annualized revenue, which would be the second of the cloud stocks compared to Snowflakes and would be about double the Zoom ratio.

It would also be a gigantic offer, with $ 1.48 billion, assuming subscribers buy their allotted shares. According to FactSet, only two IPOs for US business software have ever exceeded this mark and both have taken place in the last seven months. Cloud provider Cloudflake was the largest, raising $ 3.9 billion in September, followed by Qualtrics, which raised $ 1.78 billion in January after leaving SAP.

“The snowflake for me was the most positive perfect story,” Dollarhide said, adding that he did not own the shares. “It came out at the right time. It was just a nice investment if you were lucky enough to get to the ground floor.”

Snowflakes doubled more on the first day of trading, to $ 253.93. Since then, it has fallen 12 percent to $ 223.09 since Tuesday. In the WisdomTree cloud index, the average price-to-sales ratio fell to 13.2 by the end of March from a December 15 report, after almost doubling from the previous year.

Founded in 2005 in Romania and now based in New York, UiPath calls its technology “automation of robotic processes.” The company’s software robots are designed to automate repetitive tasks in industries such as health care, manufacturing and energy and in all departments, including finance, human and legal resources.

UiPath’s appeal to investors depends on its ability to get customers to come back and spend more money so that revenue expands quickly, while costs (as a percentage of revenue) fall.

In its last fiscal year, UiPath reported a net revenue withholding of 145%, which means that the existing average customer increased spending by 45% over the previous year. Jon Ma, co-founder of Public Comps, called UiPath’s retention rate “best in class” and third largest of all public subscription software companies. In an “IPO demolition” published by Ma last month, he wrote that “companies continue to add UiPath robots and automate more processes.”

UiPath, which ranked 50th on the 2020 CNBC Disruptor 50 list, said in its prospectus that the number of customers spending at least $ 1 million in annual revenue increased to 89 from 43 in the previous year and 21 in the previous year. .

Subscription software companies call it a “field and expansion” strategy, allowing companies to start with a test and then buy a limited amount, with the idea that some will eventually become energy consumers. Thomas Hansen, UiPath’s director of revenue, said in the online show that UiPath helps customers see the value “in a few days or weeks.”

“No matter how big or small a customer is, the time from this initial ground for expansion often happens very, very quickly.” Hansen said.

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