Here’s why we don’t own Open Text stock, investor explains

Not just yet, says Kim Bolton of Black Swan Dexteritas, who thinks Open Text stock could go lower.

Open Text had been powering along through the first half of 2019, hitting a high of C$58 per share by late July, a 30-per-cent increase in value since the start of the year. The stock promptly hit a wall as investors reacted to a poorly-received quarterly earnings report, dropping OTEX down to as low as C$49.64 in short order.

The stock has since picked up ground and has been hanging in the C$53 range for the past month. Bolton says while he has nothing but praise for the company, investors should wait for a better entry price.

“Between Open Text and Shopify, they’re phenomenal Canadian companies,” said Bolton, president and portfolio manager at Black Swan, to BNN Bloomberg on Tuesday.

“Open Text is a leader in the enterprise information management software space. They help digitalize processes for companies and supply chains through analytics and AI-empowered solutions to help companies make better, more effective and efficient decisions. They’re recognized around the world on this. Gartner, which is the largest technology research analyst has it as a market leader in this EIM space,” he said.

“But we don’t own it,” Bolton says. “I think that you could probably buy it a little bit cheaper. We have a price target of $62. You can probably buy it in thirds and probably pick it up with a $40-something handle on it in the first third.”

Open Text reported its fiscal fourth quarter on August 1, coming in with adjusted EBITDA of $238.9 million, up a minor 0.8 per cent year-over-year, on revenue of $747.2 million, which was down 0.9 per cent from a year earlier.

EPS of $0.72 per share met analysts’ expectations but the top line fell short of the $763.5 million consensus estimate.

(All figures in US dollars unless where noted otherwise.) The miss dropped the stock almost nine per cent over the following trading day.

Open Text made a significant announcement in July that it had become a preferred partner for enterprise information management on Google’s cloud service, integrating Google services with its enterprise management software.

Last month, RBC Dominion Securities analyst Paul Treiber said that while OTEX has been a volatile stock in the recent past and thus has a valuation below that of its fellow Canadian tech consolidator peers, there’s good reason to expect solid growth going forward.

“We believe OpenText’s business has transformed over the last several years into a durable platform, which is likely to enable more consistent organic growth and greater predictability in achieving high returns on acquisitions. Greater consistency and predictability may lead to improved sentiment and potentially an upwards re-rating in OpenText’s valuation over time, in our view,” said Treiber.