The S&P500 is up 15% year to date and 42% since the start of 2023. Those gains have made it difficult to find bargains in the stock market, but certain Wall Street analysts see a lot of potential in UiPath (NYSE: PAD) And Block (NYSE: SQ).
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Keith Weiss on Morgan Stanley has outlined a positive scenario that puts UiPath at $35 per share by May 2025. That projection implies a 175% upside from the current price of $12.69 per share.
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Ark Invest’s Maximilian Friedrich published a valuation model almost four years ago that estimates Block at $375 per share by December 2025. That forecast implies an upside of 495% from the current price of $63 per share.
Spoiler alert: Both price targets seem overly ambitious, but UiPath and Block are still worth considering. Here’s what investors need to know.
1. UiPath
UiPath is the market leader in robotic process automation (RPA). The platform helps companies discover automation opportunities with process mining and task mining tools. It also helps companies build and manage software robots to automate those processes and tasks. Additionally, UiPath extends its RPA functionality to include artificial intelligence (AI) capabilities such as computer vision, natural language processing, and machine learning.
For example, UiPath’s Document Understanding product can extract information from documents, interpret it, and take action based on information. The Communication Mining product brings the same features to conversation channels such as email and chat, allowing companies to automate certain customer interactions. Forrester research recently recognized UiPath as a leader in document mining and analysis, and the IDC recognized its leadership in intelligent document processing software.
UiPath reported fairly strong financial results for its first quarter of fiscal 2025 (ended April 30), with revenue rising 16% to $335 million and non-GAAP (adjusted) net income increasing 18% to $0.13 per diluted share. But management provided discouraging context that sent the shares plummeting 35% following the report.
Specifically, management said that deals slowed toward the end of the quarter due to macroeconomic challenges and inconsistent sales execution. Those headwinds are evident in the guidance, which predicts revenue growth of just 5% in the second quarter. Founder Daniel Dines has returned to the role of CEO to steer the company through the challenging period ahead.
On the positive side, UiPath is a leader in RPA software, a market expected to grow 40% annually through 2030. The company is also tapping into the demand for generative AI with Autopilot, a conversational assistant that automates a variety of tasks. For example, Autopilot can streamline the development and testing of automations. Some Autopilot features are scheduled to become generally available in June 2024.
Wall Street expects the company to post 14% annual revenue growth through fiscal 2028 (the end of January 2028). That consensus estimate makes the current valuation of 5.3 times revenue seem fairly reasonable. Shareholders, however, are unlikely to see triple-digit returns in the coming year.
Morgan Stanley’s bull-case price target is dependent on a discounted cash flow model that assumes revenue will grow 18% annually over the next decade. That’s unlikely at this point. However, Morgan Stanley’s base-case target of $15 per share still implies the stock is cheap right now.
2. Blocking
Block is a fintech company that is splitting its business into the Square and Cash App ecosystems. Square simplifies commerce for merchants with a cohesive set of hardware, software, and banking services. That integrated product strategy differentiates Block from traditional commerce providers, which typically provide small businesses with disjointed payment processing solutions. Block aims to grow Square’s ecosystem by signing larger merchants and expanding internationally.
Similarly, Cash App simplifies consumer finance by integrating a wide range of services on one platform, including the ability to save, spend, borrow and invest money. Despite competition from PayPal and Venmo, that value proposition is resonating with the market. Cash App was the ninth most downloaded mobile application in the U.S. last year and the most downloaded digital wallet. Block is focused on driving direct deposit adoption and boosting cash inflows.
Block reported solid financial results in the first quarter of 2024, beating expectations on both the top and bottom lines. Square’s gross profit rose 19% to $820 million and Cash App’s gross profit rose 25% to $1.2 billion, for total gross profit up 22% to $2 billion. Meanwhile, non-GAAP net income rose 98% to $0.85 per diluted share.
Block made progress expanding the Square ecosystem across the high school and internationally during the quarter. Mid-market sellers, defined as generating $500,000 in annual gross payment volume (GPV), accounted for 39% of Square GPV, up from 38% the previous year. International sellers accounted for 13% of Square’s gross profit, up from 11% the previous year.
Block also made progress in boosting Cash App inflows. The number of monthly transacting users increased 6% to 57 million, and inflow per monthly transacting user increased 11% to $1,255. Management also noted strong momentum across a variety of products, including Cash App Card, Cash App Borrow, BNPL (buy now, pay later), and Bitcoin.
In summary, Block has a reasonably strong economic moat in its ability to simplify commerce and consumer finance, and the company is making progress on its strategic growth initiatives. Block has virtually no chance of achieving 495% returns by 2025, but patient investors should still consider buying a small position. Wall Street expects adjusted earnings per share to grow 40% annually through 2026. That makes the current valuation of 28 times adjusted earnings reasonable.
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Trevor Jennewine has positions in Block, PayPal and UiPath. The Motley Fool has positions in and recommends Bitcoin, Block, PayPal and UiPath. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
2 Cheap Growth Stocks to Buy Before They Soar 175% and 495%, According to Select Wall Street Analysts was originally published by The Motley Fool
