Robotic automation is one of the hottest investment growth areas as seen with the spectacular rise of the Blue Prism (LSE:PRSM) share price which has increased over 1,500% in five years. I called out this share price as unrealistic in September and it has fallen around 40% since then. Most of this fall is due to the weak market but the most hyped shares appear to have been suffering the most.
Worth the hype?
Blue Prism has a very exciting product as indicated by its excellent customer retention with recurring licence revenue making up 93% of its total. Forecast revenue growth is massive, at around 50% for the next couple of years. It has also been beating expectations which I like to see.
However the scale of the upside has attracted a lot of gamblers. At the time of writing, the share price has just gained 10% in one day after losing 10% yesterday. With such high volatility, entering at this stage is tantamount to gambling unless you can realistically assess what the business is worth. The company is releasing a trading update on Tuesday and recently these have been very positive causing surges in the share price.
Last week the chairman announced he was leaving the business to focus on other companies. I find it odd that he would leave if he thought the firm could become one of the biggest in the UK. It’s easy to forget how small this company still is and how much has to go right for it to be worth its current price.
The company is burning through cash to achieve its growth and it’s very difficult to assess how profitable it will become. I can understand the bull case for this share, but I don’t think even the best companies should be bought at any price. Even after this fall the price is still supported by hype which can easily collapse, so I’d stay away.
A good mix?
Fevertree Drinks (LSE:FEVR) has also been on my radar for a while. It has a lot of similar attributes to Blue Prism with rapid international growth, regularly exceeding expectations and an enormous valuation.
But it also offers what I think are exceptional quality metrics. These indicate how effectively it can generate profits on revenues and reinvested capital and are often over looked by new investors but are very important pointers to how quickly a company can grow. Fevertree has an operating margin of 32% and a return on reinvested capital of 44%, which is a powerful cocktail.
I particularly like the brand, which I think still has a lot of room to expand in the international market that currently only makes up 44% of its revenue. Its biggest focus has been the UK so far, but the gin trend is an international phenomenon, so there is great opportunity for global growth.
Any mention of Fevertree will include valuation at some point. With a price-to-earnings ratio (P/E) of 47.2, it’s not cheap. But you don’t expect to pay low prices for the best products. Fevertree has frequently traded at a P/E of above 100 and has never traded below 40. We may be in a bear market, which means the old rules will no longer apply but this is a share that I’d like to own, and at this price I’d be tempted to buy.