UiPath (NYSE:PATH) is a $25.79 billion technology stock that is draining out cash and seems to be having trouble with top-line growth. This means that the company may have trouble maintaining this high valuation. As a result, PATH stock is likely to keep falling.

In fact, from its peak of $85.00 as of May 26, the stock has dropped to $51.72 as of Oct. 19. That represents a drop of 39.2% in the past 5 months.

It’s possible that PATH stock could keep tumbling if UiPath cannot get profitable or produce positive free cash flow (FCF). Based on my analysis this is not likely to happen anytime soon. So look out below, PATH stock could keep drifting lower, especially if its upcoming quarterly results show more of the same.

Where Things Stand With UiPath

UiPath is a software company with an automation platform that offers a range of robotic process automation (RPA) solutions to its corporate customers. The problem is that revenue growth has been slowing.

In its most recent quarter, the company made $195.5 million in sales. But this was just 5% higher than the prior quarter’s $186.2 million in revenue. On an annualized basis that works out to just 21.55% on an annualized basis.

That may not be enough to pull the company into profitability in the next four quarters. For example, in the past quarter, the company had an operating loss of $97.8 million.

That implies that sales would have to be 50% higher before the company became profitable. So if sales grow at just 22% a year, this could take over 2 years from now to achieve.

Moreover, in the past six months, UiPath has burnt through almost $28 million in free cash flow. This can be seen on the company’s Cash Flow Statement on page seven of its latest 10-Q filing.

For example, it shows that UiPath lost $23.523 million in operating cash flow losses in the past six months to June 30. On top of that, the company spent $3.641 million in capex costs and $0.771 million in capitalized software costs. These all add up to $27.935 million in negative free cash flow.

This means that capex spending could be as much as $56 or more annually. That will end up lowering the cash balance unless the company issues more shares, diluting existing shareholders. It could also borrow the money to fund these losses. But neither of these last two options are likely to happen, as the company has $1.826 billion in cash. It will likely just draw down cash.

Where This Leaves Path Stock

Cash burn won’t put the company in danger of needing much more cash, as its cash balance can last a long time. However, analysts and the market still don’t like to see losses and negative cash flow.

The problem has been that its license revenue, the biggest portion of the company’s overall revenue, has been declining. As one Seeking Alpha analyst shows in his article, it has fallen 19.32% and 4.66% in the past two quarters successively.

Even with this decline, license revenue was still 48.9%, or almost half of the total revenue. For example, license revenue for the latest quarter was $95.547 million compared to total sales of $195.521 million.

This implies that the company is having trouble keeping its existing customers and getting them to renew. So the company is becoming more reliant on sales of new customers. This is both expensive (hence the losses) and requires long lead times.

As a result, the market will likely eventually lower the value of the stock in terms of its price-to-sales (P/S) multiple. For example, according to Seeking Alpha PATH stock trades for 30 times sales to the year ending Jan. 2022, and 22.8 times the next year.

This is simply too high. The market is likely to cut this multiple down by at least one-third over the next year if license renewal revenue does not pick up significantly.

What To Do With PATH Stock

This implies that PATH stock is worth no more than 20 times sales to the year ending January 2o22, or just $17.479 billion (i.e., 20 x $873.98 million). Moreover, 14.67 times 2023 forecast sales of $1.17 billion is $17.158 billion. So the average target market value is $17.319 billion.

Since UiPATH now has a market value of $26.56 billion, according to Yahoo! Finance, that represents a potential drop of 34.8% from its present price.

This results in a target price of $33.72 per share (i.e., 0.652 times today’s price of $51.72). That means shareholders and investors can expect to see a further drop in PATH stock. Moreover, it could be more if the company produces another quarter of net income and FCF losses. Most value investors will likely stay away from this loser stock.

On the date of publication, Mark R. Hake 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. 

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.