OpenText is a misunderstood tech stock, this fund manager says

Canadian tech stocks have done very well in 2020, led by names like Shopify and Kinaxis, but one notable exception has been OpenText (OpenText Stock Quote, Chart, News TSX:OTEX), a strong performer over the past decade which has had trouble this year while the rest of the tech market has flourished.

What gives?

According to portfolio manager David Driscoll, it’s down to the rhythm of OTEX’s acquisition schedule, which should be bearing fruit a little further down the line.

“OpenText is a little bit of a different type of technology company than you're getting with [companies like] Shopify, Enghouse or Kinaxis because essentially what they're trying to do is be efficient with all of the data transfer between within businesses and also providing AI and in cybersecurity,” said Driscoll, president and CEO of Liberty International Investment Management, who spoke on BNN Bloomberg on Tuesday.

‘“The stock has not done a whole lot this year — it’s only up about two per cent year-to- date. And that's simply because investors have to get their heads wrapped around that this is a serial accumulator. They make acquisitions and it does take time for the acquisitions to find synergies and be accretive to earnings,” Driscoll said.

OpenText posted strong numbers in its latest quarter, its fiscal fourth 2020 delivered earlier this month. Operating cash flows were up 22 per cent year-over-year to $280.3 million while total revenue climbed 10.6 per cent to $826.6 million. Adjusted EBITDA for the quarter was also up 11.8 per cent to $317.4 million. (All figures in US dollars.)

CEO Mark J. Barrenechea called 2020 a pivotal year for OpenText, arguing that the company’s information management business has “never been stronger.”

"I am very proud of the OpenText team and our many accomplishments in Fiscal 2020, including the launch of OpenText Cloud Editions, the acquisitions of Carbonite, Inc. and XMedius, expansion of our Information Management platform into the small and medium business market and valuable expanded partnerships with Google, Amazon and Microsoft,” said Barrenechea in an August 6 press release.

Last year, OpenText shelled out $1.5 billion to acquire cybersecurity firm Carbonite, which provides the company with small- and medium-sized business capabilities in contrast to its typical focus on enterprise software.

“The last quarter, things weren't as rosy as before but that's just because they made a very large acquisition. They've been able to pay for it by issuing bonds at roughly two and a half percent,” said Driscoll. “I would think that in the coming quarters, you might see a little bit more activity in growing revenues and operating margins. That's what the company has expected, anyway, and if we do get an increase in free cash flow then, of course, you're going to get a bump in the dividend.”

“In the last five years, the average dividend increase has been in the 15-per-cent range, so as long as they keep doing what they're supposed to be doing then things should be okay for the firm,” Driscoll said. “We own it in our tax free savings accounts, along with Shopify and Enghouse, so we're doing okay this year.”