UIPath pursues one of the biggest software IPOs ever as investors rotate out of cloud stocks

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UiPath co-founder and CEO Daniel DinesUiPath

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

But the company, whose software helps businesses automate office tasks, has to contend with escalating investor concern over frothy valuations and a market rotation away from high-growth tech.

In recent years, cloud has been a can’t-miss bet. From Zoom’s skyrocketing popularity after its 2019 IPO and Shopify’s growth in e-commerce, to surging demand for cloud security tools sold by Zscaler and CrowdStrike, investors now have an extensive roster of large-cap names for their portfolio.

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

Heading into UiPath’s IPO, there’s been a notable shift in the trend, as investors gravitate to stocks that have a perceived advantage should interest rates keep rising. The cloud index has dropped more than 7% this year while the Dow has climbed over 10%, outperforming the other major U.S. benchmarks.

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Cloud stocks have underperformed this yearCNBC

Jake Dollarhide, CEO of Longbow Asset Management, said that while he remains bullish on cloud stocks over the long run, sentiment has unquestionably soured. Part of that, he said, has to do with the economy reopening and uncertainty about whether businesses will pull back on their cloud spending when they return to the office. There’s also a sense of market saturation among investors because so many cloud vendors have gone public lately, he said.

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

Based solely on its financial metrics, UiPath is hitting the market at the right time. Revenue surged 81% last year to $607.6 million, and the company’s loss narrowed to $92.4 million from $519.9 million in 2019. The company’s gross margin of 89% is eye-popping even for software.

However,