UiPath’s IPO will raise nearly $ 1.5 billion as cloud stocks are withdrawn

The debut on UiPath’s New York Stock Exchange, scheduled for Wednesday, will mark one of the largest software IPOs in U.S. history and will be the first trade with the most publicity for cloud investors since Snowflake went public in September.

But the company, whose software helps companies automate office tasks, must fight rising investor concern over sparkling valuations and market rotation away from high-growth technology.

In recent years, the cloud has been a bet not to be missed. From the growing popularity of Zoom after its 2019 IPO and the growth 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 names with capital letters for your portfolio.

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

Heading to the IPO of UiPath, there has been a noticeable change in the trend, as investors engage in stocks that have a perceived advantage if interest rates continue to rise. The cloud index has fallen more than 7% this year, while the Dow has surpassed 10%, surpassing other major U.S. benchmarks.

Jake Dollarhide, CEO of Longbow Asset Management, said that while it remains bullish on cloud stocks in the long run, sentiment has undoubtedly skyrocketed. Part of that, he said, has to do with the reopening of the economy and uncertainty about whether companies will withdraw their spending in the cloud when they return to office. There is also a sense of market saturation among investors, because lately there have been many sellers in the cloud, he said.

“The pre-pandemic of the cloud 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 solely on its financial metrics, UiPath hits the market at the right time. Revenue increased 81% last year to $ 607.6 million, and the company’s loss was reduced to $ 92.4 million, from $ 519.9 million in 2019. Gross margin 89% of the company is notable even for software.

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

The stocks could still open well above that level. It is possible that UiPath has set the price range low to show growing enthusiasm by increasing its bid price, and it is possible that bankers are taking a conservative approach to leaving room for securities savings.

Even though it’s priced at $ 54, UiPath contemplates a pronounced multiple relative to almost all of its peers. At this price, the shares would be exchanged for approximately 50 times the annualized revenue, which would be the second between cloud stock and snowflake and would be approximately double the Zoom ratio.

It would also be a huge offer, costing $ 1.45 billion, assuming subscribers buy into their allotted shares. According to FactSet, only two business software IPOs in the United States have surpassed this mark and both have taken place in the last seven months. Snowflake, the cloud-based database provider, was the largest, raising $ 3.9 billion in September, followed by Qualtrics, which raised $ 1.7 billion in January, after leaving SAP.

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

The snowflake doubled more than the first trading day to $ 253.93. Since then, it has fallen 12% to $ 223.09. In the WisdomTree cloud index, the average price-to-sales ratio fell to 13.2 in late March from the December 15 ratio, after nearly doubling from the previous year.

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

UiPath’s appeal to investors depends on its ability to keep customers coming back and spending more money, so revenue continues to expand rapidly as costs decrease (as a percentage of revenue).

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

UiPath, which ranked No. 50 on CNBC’s 2020 Disruptor 50 list, said in its brochure that the number of customers spending at least $ 1 million in annual revenue rose to 89, from 43 a year. previous and 21 the previous year.

Subscription software companies call it a “land and expansion” strategy, which allows businesses to start with a trial and then buy a limited amount, with the idea that some will end up becoming advanced users. Thomas Hansen, CEO of UiPath Revenue, said in the online program that UiPath helps customers see value “in a matter of days or weeks.”

“Regardless of the size or small size a customer starts with, the time elapsed from this initial terrain to expand usually passes very quickly.” Said Hansen.

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