UiPath (NYSE:PATH) stock has become emblematic of the tech sector in 2021. When UiPath launched its IPO in April, there were high hopes on the Street for the company. PATH stock started trading around the $70 per share mark and had a market capitalization of around $35 billion.
So the IPO was hugely successful for UiPath, which has emerged from relative obscurity over the past few years.
However, the good feelings quickly came to an end. The stock peaked in May at $90. In July, the shares broke down below their initial $70 price. PATH stock hit the $50 level this fall and has slipped even more following the company’s most recent earnings report.
While most on the Street were pointing to the company’s unlimited blue-sky potential when the shares were flying high, now its critics are talking about its valuation and its slowing growth.
UiPath, however, is actually one of the most promising software-as-a-service (SaaS) companies. While many overvalued tech stocks are unlikely to return to their former peak valuations, UiPath is a high-quality firm that has gotten caught up in the correction of the tech sector.
Analysts Remain Upbeat on UiPath
Often analysts slam a stock after it has already plunged. You can count on Wall Street to downgrade a company once its share price has already collapsed. As a result, when analysts give a company positive coverage even as its share price is cratering, investors should take note.
Following UiPath’s most recent earnings report, Berenberg analyst Kingsley Crane wrote: “In the past several months, we have been increasingly positive on UiPath’s market positioning and product portfolio and we believe that shares have come down to levels which present an attractive risk/reward profile.”
Crane predicted that PATH stock could reach $64 at a time when it was trading around $47. Additionally, he upgraded the stock from “hold” to “buy.” Since then PATH stock has slipped further, and is now trading around $44.85.
Morgan Stanley’s Keith Weiss also upgraded PATH stock in December. Weiss said that concerns about the competition within the Robotic Process Automation (RPA) industry were overblown and that UiPath has a broader platform that will appeal to businesses.
So Why Did UiPath’s Shares Drop Further?
It’s important to separate a stock’s technical factors from a company’s underlying fundamentals. That’s because, when these two factors diverge, a good trading opportunity is often created.
In this case, PATH stock has come under heavy selling pressure for a couple of reasons. One, tech stocks in general have been getting hit lately, especially newer firms that aren’t very profitable yet.
And UiPath is a top holding of the Ark Invest funds, led by Cathie Wood. She has been remarkably successful over the past five years because she has made many bold, correct calls about disruptive tech companies. Her flagship ARK Innovation ETF (NYSEARCA:ARKK) along with several of her other ETFs, own significant chunks of PATH stock.
In the past, stocks tended to rally after Ark Invest reported a large position in them. However, the ARK Innovation ETF has underperformed dramatically over the past six months. Consequently, investors are pulling money out of the Ark ETFs, forcing them to sell some of their positions.
To stay ahead of the trend, traders sell stocks, such as UiPath, in which Ark has substantial holdings. That creates a self-reinforcing, downward spiral.
The Verdict on PATH Stock
UiPath was valued at a very rich level this summer. Key holders of the name, such as Cathie Wood’s Ark Invest ETF, have also run into trouble. Then tax-loss selling season started. All of that has created a perfect storm for PATH stock.
The odds of the stock rallying are improving. The price of PATH stock has dropped meaningfully, spurring analysts to defend the shares. With 2022 just days away, tax-loss selling is almost over. And Ark Invest’s ETFs are deeply oversold on a technical basis and should bounce sooner or later.
In the long-run, UiPath will need to continue growing its business to support its valuation. However, there’s been little indication of any issues on that front; by all accounts, UiPath’s earnings reports have been solid.
Actually, the setbacks of PATH stock have been technical and were spurred by momentum, tax losses, and concentrated ETF ownership positions. These issues should ease as we enter 2022.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.