The market certainly agrees with the latest major acquisition by OpenText (OpenText Stock Quote, Chart, News TSX:OTEX), but the savvy investor may want to wait for a pullback to jump in, according to portfolio manager William Chin of Caldwell Investment Management.
Canadian tech name OpenText had a bang-up 2019 and is starting off the new year with more of the same, climbing seven per cent over these first few weeks and bringing its share price above the C$60 mark for the first time.
But the hot stock needs to cool a bit before you buy, says Chin, who spoke to BNN Bloomberg on Tuesday.
“[It has] a really nice up-channel, although a little bit more gentle,” Chin said. “We’re right at the top of the up-channel so I would wait for a pullback at least to around the middle of the channel for an entry point.”
“A channel means two things, number one, buyers are willing to pay increasingly higher prices and sellers are kind of shy so they want to ask for increasingly higher prices,” he said. “Number two, if there’s a channel you can try to pick your spot pretty near the middle or slightly below the middle of the channel and you’ll have more upside potential.”
Enterprise information management company OpenText made a big splash in late December with the completed purchase of Boston-based cybersecurity firm Carbonite for $1.42 billion. The buy, which is second only to OTEX’s 2017 purchase of Dell EMC for US$1.62 million, is said to represent a change of pace for OpenText, which has some of the world’s largest corporations as clients while Carbonite’s focus is on endpoint security software and cloud data protection for small- and medium-sized businesses.
On the Carbonite acquisition, OpenText CEO and CTO Mark J. Barrenechea said in a press release in December, “We have confidence in our ability to integrate, innovate and grow the business. As previously highlighted, we are targeting for Carbonite to be on our operating model by the end of Fiscal 2021, or sooner. We expect strong cloud growth and cash flow expansion from the acquisition.”
Ahead of OpenText’s fiscal second quarter results due next week, the company met expectations with its first quarter, reported in late October, which saw revenue climb 5.9 per cent year-over-year to $706.6 million and adjusted EBITDA increase by 3.2 per cent to $354.2 million. Annual recurring revenue also grew by 7.1 per cent to $556.6 million. (All figures in US dollars except where noted otherwise.)
The quarter featured standout growth from OpenText’s Cloud Services segment, which climbed 14 per cent. Free cash flow for the Q1 was an impressive $137 million, with OTEX finishing the quarter with $1 billion in cash.
Management called the quarter a strong start to 2020, with the OpenText Cloud being hailed as propelling the company within the current business climate.
Since delivering its first quarter results, OTEX is up almost 16 per cent. The stock pays a dividend, currently yielding 1.5 per cent.