UiPath (PATH) and Asana (ASAN): Should You Buy, Hold, or Sell? The rapid rise of digital transformation initiatives, the growing popularity of public cloud services, and the integration of advanced technologies are propelling the software industry forward. Therefore, let's analyze whether...
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The rapid rise of digital transformation initiatives, the growing popularity of public cloud services, and the integration of advanced technologies are propelling the software industry forward. Therefore, let's analyze whether one should Buy, Hold, or Sell software stocks UiPath (PATH) and Asana (ASAN). Keep reading.
The software industry's long-term growth prospects look promising due to technological advancements, increasing digitization of business operations, the growing adoption of cloud-based services, and the integration of emerging technologies such as generative AI into various software applications.
However, the industry currently faces challenges from cybersecurity threats, uncertainty over when the Federal Reserve will cut interest rates, and a slowdown in cloud and tech spending. Amid this uncertain backdrop, investors could consider adding UiPath Inc. (PATH) and Asana, Inc. (ASAN) to their watchlist.
Before diving deeper into the fundamentals of these stocks, let's understand what's shaping the industry prospects.
The tech industry has had a good run since last year due to the hype around generative AI applications and the news of the Federal Reserve's rate cuts this year. These developments led to the Nasdaq Composite hitting record highs recently.
Software plays a pivotal role in the proper functioning of business operations. With the digitization of a company's processes, the demand for software has risen significantly. Gartner has forecasted software spending to increase 12.7% year-over-year to $1.03 trillion this year.
The software industry is thriving due to the rising popularity of decision support software, enterprise resource planning, customer relationship software, etc. These quality business software applications automate processes and streamline business operations. The global business software and services market is expected to expand at a CAGR of 11.9% to reach $1.15 trillion by 2030.
Similarly, the move from traditional software applications to cloud-based applications has changed the outlook of the software industry. Software-as-a-Service (SaaS) provides advantages such as scalability, flexibility, cost savings, data security, and ease of access to an enterprise. Spending on cloud application services (SaaS) is expected to rise 18.9% over the prior-year period to $243.99 billion in 2024.
Despite the solid run for tech stocks over the past few months, the industry now faces uncertainty over when the central bank will start cutting interest rates. The federal funds rate has remained in the range of 5.25% to 5.5%, and the Fed has maintained that it would look for further progress on the inflation front before cutting rates.
U.S. CPI inflation is expected to have risen 0.4% sequentially and 3.1% year-over-year in February. The high inflation figure is likely to delay rate cuts further, keeping the benchmark interest rates elevated.
This could be detrimental to the tech industry, which includes software stocks, as rising inflation and the high-interest rate environment are likely to compel clients to keep a lid on their cloud and tech spending.
Let's take a look at the fundamentals of the two software stocks mentioned above.
UiPath Inc. (PATH)
PATH provides an end-to-end automation platform that offers a range of robotic process automation (RPA) solutions primarily in the United States, Romania, and Japan. The company provides a suite of interrelated software to build, manage, run, engage, measure, and govern automation within the organization. Its platform combines AI with desktop recording, back-end mining of both human activity and system logs, and intuitive visualization tools.
On March 4, 2024, PATH announced at LEAP 2024 its commitment to supporting digital transformation and workforce upskilling via modern AI and automation technologies in Saudi Arabia through new investments.
PATH's CEO Rob Enslin said, "AI and automation can help unlock our nearly limitless potential as humans. UiPath strives to accelerate human achievement by creating the tools that allow people to see new possibilities, think bigger, and achieve more – for better workplaces and a better world."
"Automation isn't just about efficiency, it's about opening resources to tackle head on some of society's biggest challenges like climate change, healthcare access, and sustainability. In strengthening our presence in the Kingdom and launching the Saudi School of Automation, UiPath is demonstrating its commitment to Saudi Arabia by supporting digital transformation and enabling the next era of human achievement, augmented by AI and automation," he added.
In terms of the trailing-12-month gross profit margin, PATH's 84.39% is 72.6% higher than the 48.89% industry average. Likewise, its 30.94% trailing-12-month levered FCF margin is 247.7% higher than the industry average of 8.90%.
PATH's 0.48% trailing-12-month Capex/Sales is 79.3% lower than the 2.30% industry average. Likewise, its 0.46x trailing-12-month asset turnover ratio is 25.5% lower than the 0.61x industry average. Furthermore, the stock's negative 12.51% trailing-12-month net income margin compares to the industry average of 2.59%.
PATH's total revenue for the fiscal third quarter ended October 31, 2023, rose 24% year-over-year to $325.92 million. Its non-GAAP gross profit increased 25.2% over the prior-year quarter to $284.03 million. The company's non-GAAP operating income increased 142.5% year-over-year to $43.68 million. Also, its non-GAAP net income and EPS came in at $69.09 million and $0.12, representing an increase of 159.1% and 140% year-over-year, respectively.
On the other hand, its professional services and other revenue declined 28.4% year-over-year to $10.32 million. Its non-GAAP sales and marketing expenses rose 22.6% year-over-year to $152.16 million.
Analysts expect PATH's EPS and revenue for the quarter ended January 31, 2024, to increase 4.5% and 24.4% year-over-year to $0.16 and $383.69 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. PATH's stock has declined 8.5% and gained 40.4% over the past nine months to close the last trading session at $24.10.
PATH's POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It is ranked #10 out of 19 stocks in the Software – SAAS industry. It has a C grade for Momentum and Sentiment. Click here to see the additional ratings of PATH for Growth, Value, Stability, and Quality.
Asana, Inc. (ASAN)
ASAN operates a work management platform for individuals, team leads, and executives. Its platform helps organizations to orchestrate work from daily tasks to cross-functional strategic initiatives, and manages product launches, marketing campaigns, and organization-wide goal settings. It serves customers in various industries, such as technology, retail, education, non-profit, government, healthcare, hospitality, media, manufacturing, etc.
In terms of the trailing-12-month gross profit margin, ASAN's 90.22% is 84.6% higher than the 48.89% industry average. Likewise, its 10.53% trailing-12-month levered FCF margin is 18.3% higher than the industry average of 8.90%. Its 0.66x trailing-12-month asset turnover ratio is 8.4% higher than the 0.61x industry average.
ASAN's 1.49% trailing-12-month Capex/Sales is 35% lower than the 2.30% industry average. Likewise, its negative 30.56% trailing-12-month Return on Total Assets compares to the 1.39% industry average. Furthermore, the stock's negative 43.46% trailing-12-month EBITDA margin compares to the industry average of 9.33%.
For the fiscal fourth quarter ended January 31, 2024, ASAN's revenues increased 13.9% year-over-year to $171.14 million. Its non-GAAP gross profit rose 13.3% over the prior-year quarter to $154.12 million.
Its non-GAAP loss from operations narrowed 58.2% year-over-year to $15.61 million, and its non-GAAP net loss narrowed 69.7% year-over-year to $10.06 million. Also, its non-GAAP gross margin came in at 90.1%, compared to 90.5% in the prior-year quarter.
Street expects ASAN's EPS for the quarter ending April 30, 2024, to remain negative. Its revenue for the same quarter is expected to increase 10.7% year-over-year to $168.66 million. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has declined 6.9% to close the last trading session at $18.79.
ASAN's bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary rating system.
Within the Software – Business industry, it is ranked #29 out of 44 stocks. It has a C grade for Growth, Value, Momentum, Sentiment, and Quality. To see ASAN's rating for Stability, click here.
What To Do Next?
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PATH shares rose $0.71 (+2.95%) in premarket trading Tuesday. Year-to-date, PATH has declined -2.98%, versus a 7.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master's degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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