I was just skimming through an Oxford Club ad from Alexander Green, and I came across some hints that sounded a bit enticing… so I thought I’d sniff out some answers for you. This came at the end of an ad for their regular “entry level” membership and subscription to The Oxford Communique ($69/year), and this is the bit that caught my eye:

“… there’s one final investment I think you should make immediately, to take advantage of possibly the biggest opportunity of our lifetimes…

“The #1 AI Hypergrowth Stock: Your Second Shot at Apple, Amazon or Netflix

“This last investment idea is my favorite one.

“It’s a small company I’m sure you have never heard of.”

And he says what past huge winners like Amazon, Netflix and Apple all have in common is that they experienced hypergrowth… and that’s what he sees here, too:

“Hypergrowth comes when new tech pushes a company’s revenue growth to 40% or more.

“And for the past few years… this new AI company has been experiencing annual revenue growth of 47%!”

So what does this “AI” company do? Here are the hints:

“Over 10,000 companies have already lined up for this firm’s unique AI service…

“With their ‘plug and play’ AI, this tiny stock helped Uber add $22 million…

“Helped Deloitte save over $104 million…

“And even helped fintech company Fiserv make an extra $3 billion in profits!”

So… hoodat? Thinkolator sez our “secret” company here is UIPath (PATH), which has come up before in “AI” pitches — this “robotic process automation” company has been tossed around by a lot of pundits in free articles, though the only time we’ve covered it was a few months ago, when Eric Wade at Stansberry teased the stock as his “#1 AI Stock for 2024”. I also have some call options on PATH, just to get that conflict of interest up front.

How do we match? Well, UIPath did grow its revenue at an average rate of 47% from 2020 through their 2023 fiscal year. That growth was front-loaded a bit, though, and has slowed down recently, revenue growth in this past year was 24% (though that was better than the previous year’s slowdown to 19%).

And they do have “over 10,000 customers” — 10,800 as of last July.

And yes, Uber is one of the partners who uses UIPath’s process automation software and services to save money… and that case study makes it into PATH’s promo materials, too, including this video (with that specific $22 million claim)…

The other two examples given are also prominent UIPath customers, though I didn’t see the specific “savings” talked about publicly by those folks. Alex Green might have done some extra math to make those guesses.

What does UIPath actually do? They have essentially developed a software platform for automating routine business tasks… and as one might imagine, that’s an area where there’s a lot of potential for AI to make things smoother and easier and faster. Here’s how they describe themselves:

“UiPath is on a mission to uplevel knowledge work so more people can work more creatively, collaboratively, and strategically. The AI-powered UiPath Business Automation Platform combines the leading robotic process automation (RPA) solution with a full suite of capabilities to understand, automate, and operate end-to-end processes, offering unprecedented time-to-value. For organizations that need to evolve to survive and thrive through increasingly changing times, UiPath is The Foundation of Innovation™.”

And here’s the overview graphic explaining how the Business Automation Platform works, complete with their cute lil’ robot mascots:

The reason I originally placed a little bet on UIPath earlier this year was partly the “AI Story,” since they seem well positioned to provide practical AI-connected solutions for fairly mundane tasks and are valued somewhat reasonably, and partly the fact that this is just a solid and pretty compelling Sofwtare as a Service (SaaS) story — they’re migrating customers to a cloud version of their software platform, which tends to improve retention, and they have strong SaaS metrics… they’re getting more buy-in from their largest customers, and adding more large customers, they’re steadily growing their annualized recurring revenue (which was $1.46 billion as of last quarter), and their net retention is very good (dollar-based net retention is now 119% — which means, to oversimplify, that they’re not only keeping their customers, but those customers are spending 19% more). Because of the magically high margins for software, that growth should substantially improve their profit margins and provide pretty rapid earnings growth over the next year or two, now that they’re really just reaching that transition to profitability (they’ve been marginally profitable in the past, on an adjusted basis, but just had their first GAAP profit quarter)… though there is some uncertainty among analysts about what those future margins are going to look like.

This is still an expensive stock, to be clear — I like the underlying growth, and they make a pretty good argument that their business automation tools pay for themselves quickly (within 6 months or so, on average), but this is still a $12 billion company that’s valued at close to 10X sales (about 8X annualized revenue), and that issues tons of stock to cover their expenses (stock-based compensation was 28% of revenue last year — that number is going down, but it’s still crazy high). Stock-based compensation is not automatically a turnoff for investors, we’ve seen some companies get even more ridiculous with their share issuance as they’ve grown, and the best of them have avoided punishment for that and kept using “adjusted” earnings numbers even after they’re more than old enough to know better (looking at you, The Trade Desk), but eventually those costs should be a real drag on shareholder returns.

If you’re willing to accept the “adjusted” earnings, then this is a stock that’s currently trading at about 37X their expected adjusted earnings for this year (they’re in their 2025 fiscal year now, which ends next January), and is expected to grow revenue and earnings by something like 18-22% neighborhood over the next few years.

That kind of growth means that they can “grow into” this valuation, my rule of thumb is that I like to pay an earnings multiple that’s less than 2X the growth rate when looking at high growth software companies, so that would mean we’re right around a maximum “reasonable” valuation of about 40X earnings (2X the ~20% growth rate), but, of course, 40X earnings is a premium valuation, which means that the stock may well disappoint if the growth is a little lower than expected. I haven’t gotten entirely comfortable with the fact that analysts expect their margins to get worse over the next couple years, not better as we would typically assume for a SaaS company, so I’m not fully committed to PATH as an investment, I have exposure only through a small position in call options, but I’m continuing to follow the story with interest.

So… think PATH will be another great AI growth as their “robotic process automation” tools take hold? Too expensive? Too cute with the little robot mascots? Let us know with a comment below…

Disclosure: of the companies mentioned above, I own shares of and/or call options on The Trade Desk, Amazon and UIPath. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.