UK Edition
Blue Prism is the software firm once seen as the great hope of the British tech scene but now shunned by the investors who formerly loved it.
Floated on Aim at 78p in March 2016, the shares enjoyed a terrific run to more than £25 in the autumn of 2018, when they abruptly ran out of steam. Three months later they had halved and are now worth about 900p.
Blue Prism sells “robotic process automation” (RPA) software and the word robot may spark comparisons with another British tech hope, Ocado, which helps retailers automate their warehouses. But banish thoughts of gleaming hi-tech machines guiding themselves around the shelves without a human in sight: Blue Prism’s “robots” are entirely virtual and exist only as lines of computer code.
What RPA does is automate tasks that, while often mundane, were previously too complicated to be done without human brains. Often these tasks involved acting as a bridge between different computer systems in one organisation, a situation commonly found in companies that have grown by acquisition, such as banks and insurers.
One investor in Blue Prism told Questor that, although this may sound revolutionary, the software need not be especially advanced. This has led to fears that the RPA market is about to be “commoditised”: that the likes of Blue Prism will have no pricing power and will struggle to make money.
The entry of Microsoft into the market, enhanced by its acquisition last year of RPA specialist Softomotive, hardly helped.
But in this column’s view Microsoft’s experience offers support to the opposite view: that Blue Prism’s customers, once on board, will not jump ship as soon as a cheaper product appears on the market.
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Few regard Windows as the world’s best operating system from a technical point of view. But it has endured for decades. Why? Because, once you’ve bought it and a load of other software that works with it, you are loath to start all over again with a different system.
Companies that have chosen a particular RPA supplier have an even stronger motive to stick with it, Questor believes. The software tends to need access to a customer’s other systems. This means its security credentials have to be unimpeachable. Once you have satisfied yourself that Blue Prism’s software, say, really is secure enough not to put your data at risk, how likely are you to abandon it and start the procurement process again?
“Blue Prism emerged in its current form in about 2013,” the investor said. “Alastair Bathgate, the founder, was doing a lot of work on how to improve business processes and out of that came the concept of the software robot. It’s not particularly sophisticated IT; the crucial point when you are selling it is the issue of security. It took him two years to sort the security side out.
“The company was originally selling to operations people, who thought ‘this is tremendous’, but when the IT department got involved it said ‘no way’. The company soon learnt that it had to get IT on board early. This is where they were initially successful.”
If we feel comfortable that the firm can hang on to its existing customers, what scope does it have to grow? Much of the recent share price weakness can be blamed on higher sales growth from its two rivals, UiPath and Automation Anywhere. The investor we spoke to said he could not explain the disparity, although Blue Prism was spending less on its sales force and had reported reluctance of some customers to place orders during the pandemic.
Let’s look at the worst case for this firm: that it no longer grows and simply keeps its existing customers. Its sales are about £140m and if it stops spending in search of growth it should make margins of at least 30pc. This implies profits of about £40m, or about £30m after tax. If we use an earnings multiple of 15, we get to a market value of £450m, or about 470p a share.
We can see why investors are nervous. But slower sales growth than rivals is not the same as none at all. RPA has huge potential to save customers money and the acknowledged security credentials of Blue Prism’s product are a big advantage.
We’ll know more when the company announces interim results on Thursday but this feels like a stock worth a small flutter.
Questor says: speculative buy
Ticker: PRSM
Share price at close: 901p
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