OpenText (OpenText Stock Quote, Chart, News, Analysts: TSX:OTEX) looks like it’ll end 2020 about even for the year, which may not look so hot compared to other technology names, especially a number of high-flying US tech stocks. But as far as home grown talent goes, OpenText should be at the top of your list, says Teal Linde, manager of the Linde Equity Fund, who thinks the company’s future looks solid.
“OpenText is a stock we’ve got our eyes on. We don’t own it but if we had to buy a Canadian technology company it’s certainly on the shortlist,” says Linde, speaking on BNN Bloomberg on Monday.
It’s been a theme for tech in 2020, a year in which companies like Amazon, Alphabet and Facebook have all done very well, as have a number of Canadian stalwarts like Constellation Software (, Descartes Systems and, of course, e-commerce companies like Shopify and Lightspeed POS.
But not everyone has been enjoying the party. Global IT consulting company CGI Group appears to be heading for a negative return in 2020, while enterprise data management company OpenText only recently brought its head above water, currently sporting a gain of just over one per cent.
But Linde says investors should look at the wider picture when it comes to OpenText.
“If you look at the 10,000 largest enterprise companies around the world, OpenText has revealed that they’re in touch with 40 per cent of them, and it’s their goal to double that to 80 per cent as potential customers,” Linde said. “They have about 74,000 customers around the world and OpenText has revealed that they only have about a ten per cent penetration rate of their existing products into the company. They have the goal of reaching out to more of the large companies around the world and selling more of their product into their existing customer base.”
“Investors have heard this before and so it’s a little bit of more of the same, but the reason why it probably has more credibility today is because of the cloud,” Linde said. “The cloud makes it much easier to distribute the software products to customers. So, given the reasonable valuation, given the customer base it already has, given the low penetration of its existing products into that customer base, this company should be able to achieve decent organic growth rate going forward in addition to the acquisition strategies that it also employs.”
“Again we don’t own it but if I had to buy Canadian tech stock today it would be on the short list and perhaps one we would buy,” Linde said.
The relatively poor showing this year for stocks like CGI and OpenText seems like a strange state of affairs, especially since both companies appear to be set up well for a future requiring greater investment by businesses in their tech infrastructure. The COVID-19 pandemic has brought a work-from-home culture to the fore, encouraging businesses to bulk up their resources at the same time that the wider digital transformation continues its progression.
National Bank Financial analyst Richard Tse said that OpenText, which relies to a significant extent on acquisitions to grow its top and bottom lines, appears to be out of favour with a market showing a preference for organic growth rather than OTEX’s brand of growth-by-acquisition.
Speaking to OpenText’s latest quarterly earnings, Tse said in a client update on November 6 that the company’s strong showing in its latest quarter was not reflected in the stock price, leading to a valuation disconnect and a potential opportunity for investors.
“Going forward, we see a growing base of recurring revenue through acquisitions, expanding operating leverage and optionality from organic growth that’s not fully priced into [Open Text] stock,” said Tse, as reported by the Globe and Mail.
OpenText delivered its fiscal first quarter 2021 results on November 5 for the period ended September 30, 2020, showing record annual recurring revenues and total revenues up 15.4 per cent year-over-year to $804.0 million. Adjusted EBITDA for the Q1 was up a full 34.7 per cent compared to a year earlier to $342.3 million. Analysts had on average been expecting adjusted EBITDA of $277 million. (All figures in US dollars.)
OpenText’s share price is up almost 12 per cent since its November 5 earnings report.
On the quarter, CEO Mark Barrenechea called it a great start to the fiscal year with record performance across all of the company’s metrics.
“We demonstrated outstanding execution in a challenged environment with total revenues of $804.0 million, an increase of 15.4 per cent year-over-year and Cloud Services and Subscription revenues of $341.0 million, an increase of 43.7 per cent year-over-year, being our largest revenue contributor,” Barrenechea said in the press release.
“Our Annual Recurring Revenues grew 22.0 per cent year-over-year to $670.4 million and now represents 83 per cent of total revenues. These record results demonstrate the strength and resiliency of our business, supported by a predictable Annual Recurring Revenue framework, that we believe positions OpenText very well for future cloud growth and market share gains,” Barrenechea said.