Blue Prism crashes 30%, but is it time to load up?

Investors are running away from Blue Prism Group plc (LON: PRSM), but should you follow the herd or invest against the tide?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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?

Mixed outlook

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. 

Conclusion 

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »