The recent share price slump in Imagination Technologies (LSE: IMG) following Apple’s decision to walk away from the former’s intellectual property is without doubt a wonderfully clear, if somewhat brutal, cautionary tale against backing companies that have a huge dependence on one specific customer.
Over the years, the company’s chip designs have been used in the $735bn cap tech giant’s most popular products such as iPhones, iPads and iPods. Thanks to Apple developing its own graphics technology, within 24 months this will no longer be the case. With that goes 50% of Imagination’s annual total revenue and — given the Kings Langley-based company’s preference for being tight-lipped when it comes to numbers — potentially more in terms of its profits.
Whether management is justified in its belief that one of the world’s most valuable companies will struggle without Imagination’s involvement is debatable at the current time. With its huge research budget and unquestionably talented workforce, I wouldn’t be so sure. What’s more certain is that any protracted legal challenge is unlikely to be positive for the latter’s shareholders, some of whom may already be nursing significant paper losses of around 65% if not more (five years ago, Imagination’s shares traded just below the £7 mark).
While it’s never a great idea to sell in haste (and crystallising a loss is always difficult), I struggle to see how Imagination Technologies can be a rewarding investment over the short-to-medium term. To paraphrase the great British economist, John Maynard Keynes, the facts surrounding Imagination have changed and many once loyal holders have already changed their minds. Sometimes, the herd is right.
While long-sighted contrarians may be willing to give Imagination Technologies and its management the benefit of the doubt, I’m far more optimistic on the prospects of robotic process automation company, Blue Prism (LSE: PRSM), particularly after today’s very encouraging trading update for the current financial year.
In the five months to the end of March, Blue Prism secured 151 new software deals. Of this number, 87 were new customers obtained via its channel partners — as clear a signal as you’re ever going to get that this company is growing exponentially. Sixty of the remaining deals were up-sells across 40 customers already on Blue Prism’s books.
Perhaps most significantly for existing holders, the £300m cap’s board now expects full-year revenue to come in “significantly ahead of market expectations” as a result of the progress made so far and its product pipeline. This bullish call also explains why the company will be continuing to invest in its sales and marketing activities for the foreseeable future with the clear intention of turning Blue Prism into a global player.
Commenting on the update, CEO Alastair Bathgate signposted his intention to provide “greater insight” into the company’s progress when interim results are announced on 27th June. While ongoing and enhanced investment means that Blue Prism is unlikely to turn a profit for a while, the rate at which customers are being drawn to using its software suggests that this may come sooner than originally thought.
Perhaps understandably, shares in Blue Prism soared over 15% in trading this morning. While increased competition in this potentially hugely-lucrative industry is to be expected over the next few years, I remain confident that this is one company risk-tolerant investors won’t be able to ignore for much longer.