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Lower Earnings Aside, Open Text Remains One of Canada’s Top Tech Stocks  

Will Ashworth

Published: May 10, 2023 10:35 pm

Open Text (CA:OTEX) reported its third-quarter 2023 results last week. Revenues were up 44.9%, excluding currency effects, to $1.28 billion, with a 41.1% increase in annual recurring revenues.

If you only read the first paragraph, you would assume it generated a significant profit increase in the third quarter. That didn’t happen. Its GAAP-based net income fell 22.9% to $58 million.

However, on a non-GAAP basis, it earned 73 cents a share, 4.3% higher than 70 cents in Q3 2022. Further, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) jumped 29.1% to $367.3 million.

“We remain on track to realize our growth targets and acquisition commitments, including a $400 million cost savings plan, consolidated net leverage ratio of less than 3x within eight full quarters and meet our free cash flow plan,” said Madhu Ranganathan, OpenText EVP, CFO.

A ‘Best Tech’ Stock Got Even Better

The latest quarter was highlighted by the Jan. 31 acquisition of U.K.-based Micro Focus for $5.8 billion, including the assumption of debt and less Micro Focus cash. As a result, it paid 2.3x the company’s trailing 12-month revenue and 6.7x its adjusted EBITDA.

When Open Text announced the Micro Focus acquisition last August, it said combining the two companies would create a powerful software and cloud business capable of helping other companies’ digital transformations.

“Upon completion of the acquisition, OpenText will be one of the world’s largest software and cloud businesses with a tremendous marquee customer base, global scale and comprehensive go-to-market,” stated CEO Mark J. Barrenechea.

“Customers of OpenText and Micro Focus will benefit from a partner that can even more effectively help them accelerate their digital transformation efforts by unlocking the full value of their information assets and core systems.”

An argument can be made that this acquisition makes Open Text a better company, but it doesn’t appear to have moved investors.

Performance Has Lagged

The fourth-largest holding of the iShares S&P/TSX Capped Information Technology Index ETF (CA:XIT), OTEX stock’s up nearly 35% year-to-date, almost two full percentage points higher than XIT.

However, Open Text has significantly underperformed its Canadian tech peers over a longer period. XIT is up nearly 140% over the past five years, six-fold better than Open Text. Since the acquisition’s announcement, OTEX is up 15%, less than half of XIT’s return.

One cautious note worth mentioning is that OTEX stock ranks at 186 out of 9,769 companies screened in Fintel’s Short Squeeze Score. That number is generated using a multi-factor quantitative model that identifies companies that have the highest risk of experiencing a short squeeze. The scoring model uses a combination of short interest, float, short borrow fee rates, and other metrics. The number ranges from 0 to 100, with higher numbers indicating a higher risk of a short squeeze relative to its peers, and 50 being the average.

Analysts Remain Bullish

Five of the seven analysts covering its stock either rate it a moderate or outright ‘buy’ (4.29 out of 5), up from 4.17 a month ago, according to The Globe and Mail. 

On May 8, Scotiabank analyst Kevin Krishnaratne upped his price target for Open Text to $50 from $43. He continues to rate it ‘sector Outperform’.

“We remain bullish OTEX, which continues to deliver on its financial objectives and is ahead of plan with Micro Focus, Krishnaratne said, per The Globe report. “Micro Focus adds new products in Cybersecurity, AI, and Analytics among other new technologies that are poised to drive new customer use cases and expand share of wallet, with expectations of a continued acceleration in organic growth over the near-term (and a return to organic growth at Micro Focus in FY25).”

Eight Capital analyst Adhir Kadve, who has a ‘buy’ rating on the stock, upped his target price to $50 from $45.

As we see it, Open Text remains one of Canada’s best tech stocks.

This article originally appeared on Fintel