What happened

Shares of UiPath (PATH 2.22%) fell 10.6% in December, according to data provided by S&P Global Market Intelligence. The stock fell early in the month after the company reported financial results for the third quarter of its fiscal 2022. It also pulled back after receiving an analyst downgrade in mid-December, in addition to the ones it received immediately following the earnings release. Lastly, technology growth stocks like UiPath generally took it on the chin in December, worsening the stock's underperformance for the month.

So what

UiPath offers enterprise software that automates menial tasks to increase workplace productivity. On Dec. 8, the company reported third-quarter results outpacing analysts' expectations. It generated quarterly revenue of almost $221 million, whereas analysts only expected around $209 million. Moreover, on an adjusted profitability basis, UiPath broke even while Wall Street had expected a loss.

Two business people analyze charts and statistics displayed on printouts and a tablet.

Image source: Getty Images.

Immediately following the third-quarter results, at least five different analysts lowered their price targets for UiPath stock on valuation concerns. But BMO Capital analyst Keith Bachman waited until Dec. 15 to lower his price target from $57 per share to $52, according to The Fly, once again citing concerns over its valuation. These concerns are valid to an extent; UiPath stock is still pricey, trading at a price-to-sales valuation multiple of 26 even after its 11% drop in December, meaning the valuation was much higher before this. 

PATH Chart

PATH data by YCharts.

Now what

Since going public in 2021, UiPath stock has gone down almost 40%, while the S&P 500 has gone up around 15%. That disparity is quite disappointing for shareholders, but there is reason for optimism as we kick off 2022.

Consider that many of the analysts who lowered their price targets for UiPath stock -- including Bachman -- also mentioned how strong the underlying business is. Indeed, as of the third quarter, the company had more than 9,630 customers, an increase of 23% year over year. And this customer list includes some top-tier enterprises like Adobe and Uber Technologies. Indeed, nearly two-thirds of the Fortune Global 500 use UiPath's software. That's an impressive accomplishment.

UiPath also impressively gets customers to spend more over time. For example, when the company went public, it shared some stats about its customers that joined in 2016. Annual recurring revenue from these customers increased 57 times over the following five years. And the 2016 cohort isn't an outlier. UiPath customers tend to spend a lot more over time as the software proves its merit. 

Therefore, it's reasonable to expect the same thing will happen over time with the thousands of new customers UiPath added in 2021. Yes, the stock is underperforming the market, and investors should take its valuation into consideration. But over the long term, stock price tends to correlate with business performance. And UiPath's business is still performing well, which is a good reason for shareholders to remain optimistic in 2022.