Descartes or OpenText, which is the better buy?

Investors looking for good value in Canada’s tech field may need to go beyond Descartes (Descartes Stock Quote, Chart, News, Analysts, Financials TSX:DSG) and OpenText (OpenText Stock Quote, Chart, News, Analysts, Financials TSX:OTEX), both of which aren’t likely to bring in good returns, according to portfolio manager Ross Healy.

It’s a study in contrasts, where enterprise information management company OpenText had a rough year in 2020, the stock managing to return to even by the end of December, while logistics SaaS provider Descartes Systems shot up over the summer and then cruised to a 34-per-cent return.

But while both companies saw pandemic-related challenges in 2020, they came out looking pretty good, nonetheless. OpenText, for example, showed in its most recent quarter a revenue pop of 15.4 per cent year-over-year while Descartes’ latest quarter featured revenue up five per cent from a year earlier.

Still, Healy says both stocks have their worries at the moment.

“Descartes, I think if you own the stock you’ve done phenomenally well in it,” says Healy of MacNicol & Associates Asset Management, who spoke on BNN Bloomberg on Monday. “But the fair market value is 78 per cent lower than the current price so there’s been a lot of momentum behind this thing but there hasn’t been a lot of value support.”

“And the problem with OpenText is it happens to be trading right at its fair market value and it has not been above that level of fair market value at about C$63-C$64.00,” Healy said. “And right now, unfortunately, I can’t give you any more than that unless the stock breaks out above that level, and it hasn’t for ten years.”

Healy says the predicament in owning tech stocks like these lies in their relative volatility, which is especially problematic when investors are looking for places to trim their positions.

“[OpenText and Descartes] are the stocks that I would be nervous about going forward,” Healy said. “They are the very expensive stocks that if you’re looking to buy value stocks, well, what are you going to use? You’re going to use the proceeds from these very expensive stocks to buy them because you’re downscaling your risk very substantially. I think that’s very much the case.”

“So, I think if you’re looking for a source of cash I’d use both of them,” Healy said.

Ahead of OpenText’s second quarter fiscal 2021 results due on February 4, the company saw a nice boost to its share price after its fiscal Q1 delivered in early November. There, the company’s $804-million topline came as a surprise according to analysts who were calling for $755 million. EBITDA was $342.3 million, up 35 per cent year-over-year and well above the $277-million consensus estimate. (All figures in US dollars except where noted otherwise.)

CEO Mark J. Barrenechea called the quarter a great start to OTEX’s fiscal 2021, noting record performances across all key 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,” said Barrenechea in a November 5 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,” he said.

Descartes fared a little less well in its latest quarter compared to analysts’ forecasts, delivering $85.5-million in revenue for its third quarter 2020 compared to the expected $85.9 million. Earnings were a beat, however, at $13.3 million or $0.15 per share compared to the expected $0.14 per share.

“Supply chains and logistics have never been more visible, relevant or important than in today’s market,” said Edward J. Ryan, Descartes’ CEO, in a December 2 press release. “Every day, our customers are faced with new challenges and opportunities as they navigate uncertain and dynamic trading conditions. Our Global Logistics Network (GLN) is designed to help the logistics community navigate those challenges and identify and capitalize on opportunities.”

Last month, OpenText reached a settlement with the US Internal Revenue Service related to taxable income for its fiscal 2010 and 2012. The settlement will see OTEX pay about $290 million in federal taxes and interest against the IRS’s disputed claim value of about $830 million. OpenText said the settlement, which will eliminate about $90 million in future withholding taxes that OpenText had expected to pay over the next ten years, with result in a $290-million charge for its second quarter fiscal 2021 in February.