Since going public in March 2016, the share price of work automation software provider Blue Prism (LSE: PRSM) has increased over 1,800%, richly rewarding shareholders with a nose for growth stocks. This has given the loss-making company a market cap of £1.5bn despite boasting just 271 employees at the end of April.
Obviously, any investor on the outside looking in will feel irritation at having missed out on this tremendous return, but the pertinent question to ask is whether this sort of return can be repeated in the future.
Well, the bull case for Blue Prism has merits. The company sells what it calls ‘automation robots, which may bring to mind iRobot but in reality are more Office Space as they’re actually software programmes that perform just the type of repetitive, mind-numbing back office work that leads office workers to destroy printers in a field!
The market for this sort of software is understandably massive as companies of all stripes look to cut costs by replacing humans performing low-end work with much cheaper software. Indeed, Blue Prism is growing at a rapid clip with 223 new customers brought on board in the six months to April and that helped boost revenue by 145% year-on-year.
However, even with revenue doubling during the period, the company’s turnover was still only £22.9m which, compared with its market cap of £1,500m, shows just how much future growth investors are already counting on.
And while revenue is growing quickly, so are costs and in the same period losses widened from £3m to £5.4m as staffing costs more than doubled. Of course, with the group growing so quickly and investors willing to continue pumping cash into the business, this isn’t a huge worry. Still, it does make the company’s valuation look even crazier in my eyes.
Over the long term, I also worry about the highly competitive nature of the sector. Blue Prism is far from the only player in this burgeoning sector and as it grows, competition is sure to increase as bigger tech players enter the field. So, while Blue Prism has high potential, I can’t look past the fact that this loss-making business is valued as highly as it is while competition in the sector heats up.
Investing in humans instead of softwareÂ
A less highly-valued but still fast-growing business I have my eye on instead is asset management consultancy Alpha Financial Markets Consulting (LSE: AFM). Last year, the group’s sales increased 51.5% to £66m as cost pressures and regulatory scrutiny led asset managers to hire the group’s consultants to advise on M&A integration, ways to trim costs without sacrificing capabilities and how to implement new technology, among other areas.
Encouragingly, the group’s business provides fairly high margins with EBITDA last year hitting £13.9m, although £7.1m in financing charges related to the group’s IPO led to a small statutory loss. Looking ahead, I think the group is a good position with IPO proceeds wiping out all debt, margins growing, opportunities for organic growth as it opens new offices in Asia and the US, and potential for inorganic growth via small bolt-on acquisitions that bring in experts from a broader range of areas.
Plus, with a valuation of under four times full-year sales and a decent 2% yield, I think Alpha is far more attractively priced at present than Blue Prism.