Will Blue Prism Group plc be the next ARM Holdings after today's profit upgrades?
Robotic process automation (RPA) specialist Blue Prism(LSE: PRSM) has released an excellent trading update today. It shows that the company expects to report financial performance for the year to 31 October which is comfortably ahead of previous expectations. As a result, its shares have risen by over 10% today. Could it become a major UK technology company, thereby becoming the next ARM Holdings?
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Blue Prism's momentum in the first three quarters of the year continued into the final quarter. It achieved strong new business wins, with 39 customers won in the fourth quarter of the year. This takes its total customer base to 153 versus 57 at the same point last year. Blue Prism has been successful at upselling products and services to existing customers, while its channel partner ecosystem has continued to gain traction.
Blue Prism has brought forward investments that were previously scheduled for 2017 into the second half of 2016. Alongside greater investment in growing its US sales team, this provides it with a bright long-term outlook. In fact, the RPA market continues to demonstrate encouraging signs of rapid growth. With Blue Prism having a sound balance sheet with £11.8m of net cash, it's in a strong position to capitalise on long-term growth trends.
As such, it has the potential to become a highly successful technology company. However, its potential to become the next ARM Holdings is unclear, since Blue Prism remains relatively high risk and unprofitable. In fact, in the next financial year its bottom line is due to remain in the red, with a pre-tax loss of £4.5m forecast by the market.
Profits today
Certainly, much of this is due to investment in the company's long-term future. However, it may be prudent for investors to consider technology companies that are highly profitable at the present time. For example, Micro Focus(LSE: MCRO) is expected to grow its earnings by 6% in the current year. Over the long run it has the potential to grow its earnings at a faster pace thanks to the integration of HPE.
Not only does this strengthen the company's core offering, it also provides synergies and new avenues for growth. It could also help to provide greater stability as well as diversification prospects over the medium to long term. While ARM Holdings was a fast-growing company, it also offered a degree of stability within a volatile sector. Micro Focus has been able to grow its earnings at a double-digit pace in each of the last five years, so in terms of consistency and a high growth rate it appears to be the natural successor to ARM Holdings within the UK technology space.
Clearly, Blue Prism has a bright long-term future, but on a risk/reward basis Micro Focus seems to be the better buy at the present time.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
