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Is this growth stock a bargain buy after today’s results?

Shares of Blue Prism (LSE: PRSM) are trading 7% higher at 825p after it released its half-year results today.

Revenue for the six months to 30 April was up 133% on the same period last year as new customers flocked to the company that enables organisations to create a “digital workforce” powered by “software robots” that are trained to automate “manual, rules-based, administrative processes,” (a.k.a. back-office clerical tasks).

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Is this growth stock a bargain buy after today’s results?

Impressive growth but…

Blue Prism, which floated on AIM in March last year, is certainly showing impressive top-line growth. The first half’s £9.3m was almost as much as for the entire previous financial year. Furthermore, an impressive 91% of the total is recurring revenue, while the customer base increased to 271 from 90.

The company reported an increased loss of £3.1m (up from £2m), as it made considerable investments in its global sales and marketing teams. Nevertheless, the balance sheet remains healthy with cash of £10.6m and no debt.

Already sporting a portfolio of blue-chip customers (and several blue-chip institutional investors), Blue Prism appears to have continuing high-growth potential. However, it’s hard to know how strong its claim to be “differentiated” from its competitors is and what its long-term sustainable profit margin might be when it actually starts making a profit.

Over-valued?

At the moment, I can only value the company on its revenue. My rule of thumb is that I won’t pay more than a single-digit multiple of current-year forecast revenue, unless there is some known event that will entirely transform the top line the following year — for example, the completion of an acquisition.

At the current share price of 825p, Blue Prism’s market capitalisation is £515m, so I’d be looking for revenue of £51.5m at the very least before considering the stock as a potential investment. However, current-year forecast revenue is £20m, followed by £25m next year. As such — and promising though the business appears to be — the stock is currently very much over-valued in my book.

A sage tech pick

When it comes to valuation, we’re on much firmer ground with established FTSE 100 tech stock Sage (LSE: SGE). This £7.7bn multinational giant may not have the exciting potential of an earlier-stage business such as Blue Prism, but it has very decent growth prospects and much lower risk.

The company, which is the market and technology leader for integrated “Accounting, People & Payroll and Payment & Banking solutions,” has been going through a customer-focus and efficiency transformation and is in a phase of accelerating earnings growth.

Accelerating growth

At a current share price of 713p, Sage trades on 4.4 times forecast revenue and 22.5 times forecast earnings for its financial year ending 30 September. This would see earnings growth accelerate to 14% from 11% last year and 9% the year before that. And there’s a handy prospective 2.2% dividend yield on offer.

I see Sage as a wise buy on the basis of the growth momentum in the business and its lower risk profile in the often hard-to-risk-assess software and solutions sector.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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