My primary concern when investing in equities is to avoid mistakes, and the most obvious ones occur when we chase runaway rallies. That’s not a worry today, because we will consider the upside potential of UiPath (NYSE:PATH) stock. PATH stock is now about 50% off of its May all-time highs. The bears have systemically sold it down in a sharp descending channel for months.
Investors looking to own it now are most definitely catching the proverbial falling knife. Today we will debate if this is reasonable action, or if it’s foolish and based on false hopes. Most likely, somewhere in the middle will lie a logical conclusion regarding PATH stock going into 2022.
PATH Stock Showing No Signs of a Bottom Yet
When a stock is falling out of control, it is important to first find signs of stabilization. Otherwise, assuming this time is different without any proof is risky behavior.
The hints can come from two different angles. First, it could hit a tradable bottom where the stock had found support before. That’s not the case here because PATH stock has been continuously making lower-lows.
The second option would be to lean on “value” building from the lower stock price. That’s where investors could find some hope. Although it is not cheap, PATH stock has improved its profit and loss statement. Yet it still cannot find enough buyers to stop the slide. Most likely, it simply needs more time to build Wall Street credibility.
Besides, small cap stocks have suffered at the hands of the bears more than large caps trades have recently. The Russell 2000 index has fallen 7.8% from its highs in a month. It’s hard for any stock, including UiPath, to find footing while the whole index is falling.
Favorable Demand Conditions
This is where due diligence comes in handy and investors need to do a bit of homework. The company is not new, but it is new to Wall Street. It operates in the right area, as UiPath specializes in digitizing business processes and there’s strong demand for its services currently.
This also means the company will have to compete with giants, but that’s good news because it justifies its business model. The software services sector has been around for years. Major players with deep pockets are continuously pushing it even further. UiPath is riding a favorable tide, so its stock ailment should be temporary. In the end, there’s likely enough business for all providers to prosper.
UiPath casts a wide net of products and services. There’s no reason to doubt their competence since they are improving there revenue streams. Investors who believe in it for the long term have the right to do so. Taking bullish positions here makes for a good start, but it is also important to keep from going all in for several reasons.
PATH Stock Is in Good Company
First of all, this stock is indeed still making lower lows. Betting that this is the bottom carries risk on its own. Moreover, there is extrinsic uncertainty from the overall 2022 macroeconomic picture. The U.S. Federal Reserve might be getting ready to start a tapering program.
The stock market is still near its all-time highs, so there’s plenty of room to fall. PATH stock cannot rally on its own in a market that is correcting. The level of conviction, regardless of the quality of the stock, should remain humble. That’s the only way we can manage risk when we face adversity. No one plans to have an accident, yet they still do happen.
Most investors pick good stocks — the pitfalls usually happen with the timing of entries and exits. The old school approach of buying and holding for eons doesn’t quite fit most people’s needs these days. Thus, a carefully-timed entry into PATH stock will lead to profits in the end.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.