Fans of Canadian tech stocks have enjoyed strong results over the years from enterprise information software company OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials TSX:OTEX), but the past 12 months have been less rosy, with the stock now down about 22 per cent. What does the future hold for the stock? Likely more downside, says Darren Sissons of Campbell, Lee & Ross, who has no complaints about the company but is worried about the broader market position on tech stocks these days.
“We actually sold the last portion of OpenText that we owned and had owned it for five or six years. I think it’s a great story, but I do think of the current environment where a ‘baby and bath water’-type of dynamic is in play, where people are selling everything, and they’re selling names that are producing genuine returns, particularly [in] tech,” said Sissons, vice-president of Campbell, Lee & Ross, who spoke on BNN Bloomberg on Friday.
With currently about a C$12-billion market cap, OpenText produced solid returns for about a decade between 2011 and 2021, rising by a combined value of about 385 per cent over that time span. But the stock started dropping last September and since has continued its downward slide along with much of the tech sector as the market rotates away from growth names toward more defensive and value plays.
The company itself has been humming along nicely, reporting 8.1 per cent year-over-year revenue growth for its fiscal 2021, ended June 30, 2021, with its Cloud business revenues up 21.6 per cent for the fiscal year. More recently, OTEX reported record fiscal third quarter revenues last month, hitting $882.3 million for a year-over-year increase of 5.9 per cent, notching its fifth consecutive quarter of organic growth. Cloud Services and Subscriptions revenues were up 13.0 per cent to $401.9 million while Customer Support was down 3.4 per cent to $332.5 million. (All figures in US dollars except where noted otherwise.)
The company said its information management products are doing well in the current era of digital transformation, where businesses in all fields are adopting new tools to run their operations.
“OpenText’s strong third-quarter performance, amidst challenging global macro-dynamics, reflects the strength, durability and resiliency of the OpenText business model,” said CEO and CTO Mark J. Barrenechea in May 4, 2022, shareholder letter. “Our cloud strategy is working, and we are seeing the results of our efforts as we help our
customers to digitize, transform and grow. We continue to invest in talent, innovation, and technology to drive our growth strategy and we are well positioned to grow and extend our leadership in the $92 billion Information Management market.”
Management offered no change to its full fiscal 2022 outlook after the fiscal Q3, calling for revenue growth of between three and four per cent with a Cloud revenue growth rate of between eight and ten per cent, although the company did say 2022 revenue would likely end up closer to three per cent.
OTEX also comes with a sizeable (for tech stocks) dividend currently sporting about a 2.3 per cent yield, with management saying in the third quarter report that it had repurchased a million shares over the quarter and targeted about 33 per cent of its trailing 12-month free cash flow at share buybacks and dividends.
“With approximately $1.6 billion in cash as of March 31, 2022, and a net leverage ratio of 1.9x, we have the financial flexibility to continue to drive growth through product innovation, talent, go-to-market and strategic acquisitions,” said CFO Madhu Ranganathan in the third quarter press release.
But for Sissons, the pullback on OpenText may have some more legs to it, especially with the slower calendar third quarter up ahead.
“In this particular case, I do think there’s some downside. Q3 tends to be bad for the company,” Sissons said. “You’re probably going to get a better entry level here, but if you’ve owned this for long periods of time and have deep embedded capital gains, I’d just hold it and perhaps buy more.”
“[It’s] a good quality company. I just think it’s going to go down a bit further,” he said.
For a contrary view, National Bank analyst Richard Tse reiterated an “Outperform” rating on OpenText after the company’s latest quarter, putting up a US$60.00 target price for a projected 12-month return at the time of publication of 48.8 per cent.
Tse said OTEX has strong defensive attributes for the current climate, pointing to its strong free cash flow at $306 million for the fiscal Q3 and a growing recurring revenue base which currently makes up about 83 per cent of revenue.
“OTEX remains one of our favourite ‘legacy’ names. With the market sentiment favouring profitability and cash flow, OTEX offers those compelling defensive attributes. We see a growing base of recurring revenue through opportunistic acquisitions, expanding operating leverage and optionality from organic growth that is not fully reflected in its current stock price,” Tse wrote in a May 4 press release.