Blue Prism and the rise of robotic process automation

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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I currently hold shares in Blue Prism (LON: PRSM).

On Bitcoin as a global currency

The featured photo is licensed under the Creative Commons Attribution-Share Alike 4.0 International license.

The recent bullish trend in the market for Bitcoin has seen the fledgling currency really capture the eyes of the general public. In many ways, the cryptocurrency can be seen as technology’s answer to today’s fiat money, and in the same vein it has been suggested that it could grow into a new global currency, coming into greater worldwide use for transactions. Fascinating though the prospect may be, for me there are several reasons why I doubt this could happen, which relate both to how a global shift to Bitcoin could be implemented and also to how this new economic paradigm could actually work once implemented. The first of these reasons is its volatility, and with that, I’ll begin.

Reasons why to me it is unlikely Bitcoin can become a new global currency

  1. Its volatility. It is likely that over the past few months bullish speculators on Bitcoin have made substantial profits, and if the price signal of the free market is anything to go by, the upward trend in Bitcoin price shows more people are accepting its viability as a currency. However, it is this very appreciation of the currency that is a great example of the point I am trying to make: at the current moment, Bitcoin is far too volatile to be held confidently by consumers. Take the example of the pound sterling. In the immediate aftermath of the Brexit referendum, the movements of the pound were taken as an unusual sign of volatility, perhaps signalling uncertainty regarding the future trajectory of sterling exchange rates. When we compare this with Bitcoin, which has previously risen against the dollar by 50%, 33%, and 20% in 23, 60 and 63 days respectively, we can see just how unusual Bitcoin’s price movements are compared to a widely-used currency. In a potential transition period whereby Bitcoin begins to come into common use, it may be economically rational for consumers to choose not to hold Bitcoins and instead to hold currencies that are far less volatile against others. This is because sharp rises and falls in the value of the currency can significantly reduce or increase purchasing power (in countries where Bitcoin has not become as mainstream) from one day to the next. In turn, this can create uncertainty regarding future spending and hence a reluctance to hold Bitcoins as a reserve currency due to this uncertainty, limiting its potential to be a truly global currency.
  2. Limitations of monetary policy. A potential counterargument to the point raised above is that Bitcoins will stop being produced when the supply of them hits 21 million. This actually promotes price stability, and means that in the long term, the point above is moot. Fair enough. What I would say to that is it then becomes very difficult for central bankers to use monetary policy tools (such as lowering the interest rate) to stimulate aggregate demand, in, for example, the aftermath of a recession. A big point often raised about Bitcoin is that it does not lie under the jurisdiction of any government or central bank, so therefore they cannot influence the money supply and hence it would be hard for political consensus to be reached on the adoption of Bitcoin as a national currency. For the sake of the all-important flexibility of monetary policy, then, I would argue that it is not only unlikely that bitcoin will become any country’s national currency, but it is also essential that it does not. However, it is true that Bitcoin can be widely accepted for transactions without becoming a national currency – but the point below indicates to me that this is unlikely to happen.
  3. Trust. In my previous article, I talked about how paper money nowadays was backed by the trust of its users. On the surface, bitcoin can seem somewhat familiar to the fiat money I mentioned: it is not backed by any tangible commodity and hence only relies the trust of societies that use it to function as a store of value, a unit of account and a medium of exchange. However, recent happenings make this trust somewhat hard to attain for bitcoin. Firstly, the volatility which I mentioned above can create uncertainty over the future prices of bitcoin in terms of other major currencies, potentially scuppering its use. Secondly, with figures such as Jamie Dimon, the CEO of JPMorgan Chase, claiming that bitcoin is “only fit for use by drug dealers, murderers and people living in places such as North Korea.”, public perception of the currency as a means to enable criminal activity may limit its general use. Factors such as these contribute to a general lack of acceptability in transactions, which severely limit bitcoin’s potential as a worldwide currency. Similarly, the failing of Bitcoin exchanges like Mt Gox also can contribute to this lack of trust and acceptability.

To summarise, Bitcoin is indeed a hugely interesting, and potentially revolutionary, new currency. However, I hope I’ve done a good job of illustrating why I think it is unlikely to be a new global currency. Regardless, I think it’s really important to keep a huge eye out for it; to me one of the most interesting developments in the global economy is how the fledgling currency does. Let’s just wait and see.