Don’t sell your Open Text stock, Bryden Teich says

Open Text Corp (Open Text Stock Quote, Chart TSX, NASDAQ:OTEX) has seen its share price drop in recent weeks, causing investors to wonder where the enterprise information software company’s stock is headed.

But OTEX is on pretty stable ground, says Bryden Teich of Avenue Investment, who argues that by comparison with other Canadian tech companies Open Text’s valuation is still pretty good.

Over the past half-decade, OTEX has been a tech success story, with its share price rising from the mid-teens in 2013 to almost $52 by early August 2018. But the stock has experienced a sizeable pullback over the last few weeks, dropping 14 per cent since early September.

The drop off may have some shareholders worried but the company is still a relative bargain in the space, says Teich, partner and portfolio manager at Avenue Investment.

“It’s pulled back a little bit but it’s been on a pretty good run,” says Teich to BNN Bloomberg. “It’s still not very expensive as a valuation. The shares could pull back a little bit [more] but I think you’re pretty well protected. [OpenText] is still growing through acquisitions. This is similar to CGI Group or Constellation Software , but this is trading at a much lower multiple so in that respect you’re much more protected than, say, something that’s trading at an expensive multiple to earnings.”

On August 2, OTEX reported its fourth quarter and year end financials, showing a 14 per cent year-over-year revenue increase for Q4 at US$754 million, and an annual revenue of US$2.282 billion, up 23 per cent from the year before. Its Q4 adjusted EBITDA was US$28.8 million, an 18.9 per cent improvement on Q4 of 2017.

“Our fourth quarter was a strong close to a record year,” said CEO and CTO Mark J. Barrenechea. “Fiscal 2018 demonstrates the strength of our Total Growth strategy that combines both acquisition and organic growth. Further, we completed three acquisitions in Fiscal 2018 (Covisint, Guidance Software and Hightail) and we enter Fiscal 2019 with a strong balance sheet.”

Open Text stands as the world’s largest software vendor for enterprise information management. Last year, the company closed on its largest acquisition yet, a US$1.62 billion purchase of Dell EMC’s enterprise content division.

“We don’t own Open Text right now,” says Teich. “We don’t necessarily like the idea of a consolidator. We’d rather have a company that’s able to grow a technology or software rather than having to go out and buy companies. The problem is that the accounting gets very messy, there’s a risk that they’re overpaying. That’s sort of why we’ve stayed out of the Canadian tech space as a whole.”

“But Open Text is probably pretty safe here and if you own it, I’d say don’t sell it at these levels,” he says.