Even though the Alternative Investment Market (AIM) has a lousy reputation among investors, there’s no denying that over the years it has given birth to some of the UK’s most successful growth companies. Blue Prism (LSE: PRSM) is the perfect example.
Over the past few years, Blue Prism has become a world-beating software corporation specialising in enterprise robotic process automation. And its success in the sector has produced huge returns for investors. Indeed, over the past five years, its shares have added 1,500%, compared to a gain of just 47% for the FTSE AIM-All Share Index.
Recently, however, shares in the software business have started to lose altitude. The stock has cratered 30% over the past 30 days, wiping out the bulk of this year’s gains.
The big question is, should you make the most of this slump and buy Blue Prism, or is it time to get out before the shares fall further?
For a start, it is important to note that investors are already expecting a lot from this company.
As my colleague Robert Faulkner pointed out a few weeks ago, the company’s market capitalisation (currently £1.2bn) is more than 30x higher than last year’s revenue. This is an exceptionally high valuation multiple even for Blue Prism, which claims to be at the cutting edge of the robotics revolution.
For some comparison, Facebook, Google and Amazon all trade at price-to-sales ratios of less than 10. So, if we use these internet giants as a benchmark, it looks as if shares in Blue Prism could fall a lot further from their current level before they offer value.
What’s more, as the Financial Times recently reported, Blue Prism appears to be the most profitable software company in the world with a gross profit margin of 100%.
Last year, for example, the company reported sales of £38m while the cost of sales was just £13,000. Management has since explained that the gross margin is so high because the group books sales team costs as “administrative” expenses, an unusual arrangement. Still, this set-up isn’t against the rules and I don’t think it’s a deal-breaker.
Nonetheless, I am concerned about rising losses. For the six months to the end of April, the company lost £5.5m on revenues of £23m. In the last financial year (12 months to 31 October 2017) it lost £10m on revenues of £25m. Looking at these numbers, it appears as if Blue Prism is set to lose more money for 2018 than it did last year, even though revenues are on track to double.
All in all, even though the shares have fallen by 30% over the past few weeks, I am struggling to find any reason to buy the firm at current levels. I think the stock looks eye-wateringly expensive and the firm’s rising losses are concerning.
Personally, I try to avoid companies where there’s already so much good news baked into the shares as it only takes a slight change in sentiment to result in significant losses. This is probably the biggest threat to Blue Prism’s shares right now and for that reason, I’m staying away.
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Rupert Hargreaves owns no share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Amazon, and Facebook. 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.