Stocks to sell

Two months ago, it may have seemed as if UiPath (NYSE:PATH) shares were finally turning a corner. At the time, investors were beginning to bid up anything A.I.-related, PATH stock included.

However, not only is this recent wave of “A.I. mania” losing steam. Even as this provider of enterprise automation software may benefit from the acceleration of the A.I. trend, that alone may not warrant a continued rise in price.

Why? It all has to do with PATH’s valuation. Even as shares trade for a mere fraction of their 2021 debut price ($56 per share), the stock remains arguably overvalued, when you compare its current valuation to future growth forecasts.

That’s not to say that this stock, after collapsing in price during 2022 and 2023, is set to tank again in 2023. Still, this factor could negatively affect future returns.

PATH Stock, and the Rise & Fall of ‘A.I. Mania”

In my last article on UiPath, I talked about how PATH has received an indirect boost from the rise of OpenAI’s ChatGPT platform. Although ChatGPT is best known for its customer-facing platform, many believe that its debut has ushered in an acceleration of A.I. adoption by large enterprises.

Hence, PATH stock has benefited from a sudden wave of investor inflows, although inflows into PATH have been relatively modest. Shares are up just 16.3% from the start of the year, and as I mentioned above, remain well below prior price levels.

However, even as UiPath shares have only made a moderate move higher, things may be reversing course. “A.I. mania” has simmered down. Stocks that rallied due to this trend have started to move lower.

PATH could soon cough back the lion’s shares of its recent gains, following the company’s upcoming earnings release on March 15. Even if overall numbers live up to expectations, investors could use any negative aspect of the release as an excuse to sell. We’ve seen this play out with other richly-priced tech stocks recently.

Limited by a High Valuation

Don’t get me wrong, it’s not guaranteed that tomorrow’s release of quarterly results and guidance for UiPath results in a big sell-off for PATH stock. After all, there have been a few exceptions to the “sell the news” dynamic that has played out with many tech stocks in recent months.

A good example is C3.ai (NYSE:AI). AI stock briefly went on a tear after its latest earnings report, thanks to upbeat statements from its CEO regarding the potential positive impact of the accelerating A.I. trend on future results. If UiPath’s management can provide a similarly-positive outlook, shares may be able to experience another pop this week.

That said, while a “path for PATH” to move moderately higher in the short-term again may still be there, it’s debatable whether the same applies to shares making a more substantial move higher. Again, mostly due to the stock’s extremely high valuation. Shares today trade for around 225.2 times the estimated earnings for the prior fiscal year (ending January 2023).

Compared to FY24 forecasts, PATH remains overpriced, at 107.5 times earnings. In some cases, a triple-digit multiple can be somewhat justified, but that’s likely not the case here.

Bottom Line

Since UiPath went public, growth has decelerated in a big way. In FY2021, top-line growth was coming in at levels north of 80%.

For the current fiscal year, sell-side forecasts call for revenue to grow just 17.5%, from $1.03 billion to $1.2 billion. Forecasts also call for earnings to double this fiscal year. However, this growth could seriously level off, as suggested by the forecast for FY2025 earnings.

With this, the “best case scenario” may be that UiPath merely grows into its valuation, although further multiple compression due to slowing growth isn’t out of the question. Either way, future returns are likely to be subpar.

Under there’s any indication that recent trends (or another catalyst) will enable the company to handily beat current forecasts, with a valuation that’s tough to justify, hold off on PATH stock.

PATH stock earns a D rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.