One company that caught my attention recently is Blue Prism (LON: PRSM). Listed on the Alternative Investment Market (AIM), it creates robotic process automation (RPA) software. This essentially automates manual data entry, which is both low return and high risk to a firm. I invested in the company (on a virtual portfolio) at 877p a share, and since then it’s returned around 80%, with (in my opinion, at least) further potential to grow. Much of this return has come over the past two days, where the share price has gone up around 30% off the back of impressive FY2019 results. Major highlights include 83% higher revenue, allaying concerns that the business could not scale significantly enough to justify its valuation.
RPA is of course an industry that is in vogue, however beyond the media hype there is a significant reason why the sector, including companies such as UiPath and Automation Anywhere, is so highly touted. The market for RPA is set to reach $3.11bn by 2025, at a CAGR of 31.1%. Businesses from small shops to the largest multinationals could see significant efficiency gains from implementing such technology, and moreso save on the salaries of individuals employed for such a function. It fills a gaping lacuna in the centre of firms’ back office functions, doing so in a way that is both cost effective and that minimises errors.
It comes as no surprise, then, that PRSM’s revenues would see an uptick. However, in addition to this, I find a number of green flags in its most recent report. In addition to customers rising by more than two thirds to 1,677, its customer retention rate sat at 96%. This implies to me that a large proportion of revenue is “sticky”, and the products offered are clearly satisfying clients. Hence the fact that losses more than trebled to £80.7m, from £26m the previous financial year, is not a significant factor given the investment undertaken through the year.
Initially, I invested in Blue Prism as it traded on around 10 times the year’s expected revenue. Compared to its peers UiPath and Automation Anywhere in the same industry (based on estimates as these companies are private and venture-capital backed), their sales multiples are 25 to 30-times, a massive premium to Blue Prism. Analysts at Shore Capital, having done similar calculations, came to an even bolder conclusion: ‘Taking the average of the recent private equity valuations for UiPath and Automation Anywhere implies a short-term fair value for Blue Prism of $2.4bn (or £27 per share).” I see no reason for this to have changed in light of the recent rise in share price (although am eager to hear opinions to the contrary!)
Given that the business assuages a fundamental need across industries, the company should definitely continue to increase revenues (and, eventually, profits), with contained variation due to the business cycle. If I am right (hopefully!) then over a number of years revenue will continue to grow at a fast clip as the company matures and ventures into profitability.
An interesting question, however, is the impact of RPA on the economy in general. There is no doubt in my mind that the technology has the potential to make redundant the most vulnerable in society. With the continuing trend of automation this threat was always going to get larger as we move into the 20s. Hence, for policymakers, a challenge is faced on a level not really seen since the Industrial Revolution. To me, the solution lies in state-funded re-training programs to make the labour market more flexible. In addition, a universal basic income as proposed by Andrew Yang in the Democratic primaries makes a great deal of sense to me as automation progresses, because primarily it gives workers the flexibility to retrain and prepare themselves for the long-term.
Overall, then, to me Blue Prism is a solid investment in a truly exciting growth company. Robotic process automation is a great example of creative destruction, however in a broader sense policymakers need to consider certain impacts of this technology. Questioning themselves on how to avoid a sustained rise in the unemployment rate may lead to some off-the-beaten-track initiatives, which have the potential to safeguard the most vulnerable while ensuring firms continue to increase efficiency and the economy continues to grow.
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This article does not constitute financial advice in any way, shape or form.
I currently hold shares in Blue Prism (LON: PRSM).