Robotic Process Automation From Blue Prism
Japan is an interesting place, with many things happening that most people don’t hear much about. Take for example, the legendary tanuki. It’s a dog-like raccoon-looking thing which roams the forests of Japan, carrying a set of testicles so large, that it uses them like a drum set to communicate with other tanuki. While the whole giant testicles thing is a myth, the tanuki does actually exist in the forests of Japan. If you’re lucky, you might see one while playing a game of shogi, a Japanese version of chess, which was recently mastered by a Japanese artificial intelligence (AI) company called Heroz. Just this past week, Heroz debuted their shares on the Japanese stock exchange leading to tenfold jump in share price on the first day of trading, with hype levels surpassing even those seen in the dot-com boom.
Seems like many developed countries are starting to jump on the artificial intelligence bandwagon, and it’s leading to increased interest from retail investors as to how we all might be able to invest in the AI theme – aside from buying some more shares of Nvidia. However, other opportunities are popping up, as companies now see AI as a must-have to compete, companies like Pega.
We recently wrote about a company called Pegasystems which is using Robotic Process Automation (RPA) as a way for AI to start automating the more mundane aspects of white collar jobs. Now we’re going to take a look at another company across the pond that’s doing much the same thing.
Founded in 2001, London-based company Blue Prism (PRSM) took in $59 million in funding before deciding to go public in March of 2016, trading on the London Stock Exchange under the ticker PRSM. We first came across the company in our article on Artificial Intelligence in Business Process Automation where we noted that since their IPO, shares of PRSM have risen over +1,000% giving the company a present day market cap of around $1.66 billion. This rapid share price appreciation is a cause for concern based on something we refer to as “financial market efficiency“.
According to some fellow named Eugene Fama, an efficient financial market is “one in which prices always fully reflect available information”. Are we to believe that in just two years’ time, enough new information was made available to justify a tenfold increase in Blue Prism’s share price? Who knows, but revenues for this “small” company surely took off in 2017:
As we mentioned before, Blue Prism is in the business of “robotic process automation” which entails building software robots that can do things better than John in Mumbai, and at a fraction of the price. Just look at this example taken from an article by the Economist:
Blue Prism’s robots cost at most $15,000 a year. They can perform only routine, rules-driven tasks, but there are plenty of those about. One telecoms company replaced 45 offshore employees, costing a total of $1.35m a year, with ten of Blue Prism’s software robots, costing $100,000. The telecoms firm then spent its savings of $1.25m on hiring 12 new people to do more innovative work locally at its headquarters.
Companies like Blue Prism that use technology to generate cost savings for other companies are a sweet spot right now. That’s because when the recession we’ve all been waiting for finally happens, companies will go into full blown cost savings mode to increase earnings-per-share since revenue growth will stall. RPA solutions will sell like hotcakes no matter what direction the market takes. Just look at this slide:
Now the first thing you might notice is that this diagram is riddled with acronyms. That’s because it was written by a bunch of MBAs who will soon be replaced by the same AI algorithms they write about today. Fortunately, we have some MBAs on staff who can interpret this for us.
“Total Economic Impact” simply refers to a bunch of numbers that you can use to impress your boss within your next performance review. In this case, you would have spent $15 million upfront buying Blue Prism software robots. Over the next three years, you would save over $49 million in overall labor costs, meaning it would only take 15 months before you recouped your initial investment. After three years, the cost savings would equate to $34.3 million in today’s dollars. We call that a “net present value” which means that generally speaking, you’re losing $34.3 million by not spending $15 million today.
What should be blatantly obvious by now is that this solution sells itself when you start whipping out slides like the one above in front of cost-conscious CTOs. That’s why Blue Prism is growing so fast. All the success they’re having in upselling means that their clients see how effective these tools are and want to buy more. We’re talking some big-name customers too, like Coca-Cola, Pfizer, Prudential, Sony, and Walgreens. Brue Prism’s software robots are industry agnostic, and can be used in just about any company that’s large enough to have a back office operation in Mumbai.
With a +1,000% share price increase in just several years, investors may be tempted to think that the potential of this company is already priced in. You’d need balls the size of a tanuki to pull the trigger on some shares right now as they hover around an all-time high. Figuring out when to buy is a risk we call “market timing”, and one way to offset that is through something called “dollar-cost-averaging”. For example, you could set three arbitrary dates in the future, then buy 1/3 of your position on each date – transaction costs be damned (hint: use Interactive Brokers).
Blue Prism also faces plenty of competition, as seen in the completely useless chart below put together by some overpaid consultants:
We talked about some of these competitors before in our article on 7 Startups Using AI for Robotic Process Automation. It’s not just startups that Blue Prism needs to worry about, as other established UK companies are starting to jump on the AI bandwagon, like Sage, the largest software company in the UK and the second largest in Europe. Sage works in payroll and accounting, and their CEO hails from Chordiant. If you recall, Chordiant was one of the acquisitions that PEGA made in order to acquire their “real-time decision making engine” which is powered by AI. Long story short, Sage is now talking about how AI is going to make them a leading innovator. It’s only a matter of time before the majority of companies embrace AI, at which point the only investment opportunity will be to short those companies that didn’t.
Here at Nanalyze, we complement our tech investments with a portfolio of 30 dividend growth stocks that pay us increasing income every year. Learn how to build your own dividend growth stock portfolio in our report on Quantigence - A Dividend Growth Investing Strategy - freely available to Nanalyze Premium subscribers.