UiPath Inc. (NYSE:PATH) shareholders that were waiting for something to happen have been dealt a blow with a 45% share price drop in the last month.    The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 31% in that time.  

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about UiPath's P/S ratio of 4.8x, since the median price-to-sales (or "P/S") ratio for the Software industry in the United States is also close to 4.1x.  Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.    

NYSE:PATH Price to Sales Ratio vs Industry June 20th 2024

How UiPath Has Been Performing

With revenue growth that's superior to most other companies of late, UiPath has been doing relatively well.   It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising.  If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.    

If you'd like to see what analysts are forecasting going forward, you should check out our free report on UiPath.

Is There Some Revenue Growth Forecasted For UiPath?  

In order to justify its P/S ratio, UiPath would need to produce growth that's similar to the industry.  

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line.   The latest three year period has also seen an excellent 99% overall rise in revenue, aided by its short-term performance.  So we can start by confirming that the company has done a great job of growing revenue over that time.  

Looking ahead now, revenue is anticipated to climb by 11% each year during the coming three years according to the analysts following the company.  With the industry predicted to deliver 15% growth per year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that UiPath's P/S is closely matching its industry peers.  It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock.  These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.  

What Does UiPath's P/S Mean For Investors?

Following UiPath's share price tumble, its P/S is just clinging on to the industry median P/S.      Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that UiPath's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio.  When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower.  This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.    

We don't want to rain on the parade too much, but we did also find 3 warning signs for UiPath that you need to be mindful of.  

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com