Technology Sector Ideas

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Open Text - >>> Software Provider’s Earnings Highlight the Value of Cloud Capabilities


Barron's

By Al Root

Aug. 6, 2020


https://www.barrons.com/articles/open-text-stock-software-provider-earnings-cloud-data-subscriptions-51596748282?siteid=yhoof2&yptr=yahoo


Subscriptions for software are replacing the regular upgrade cycle that once made software company sales more cyclical.

Software provider Open Text beat earnings estimates Thursday evening. It is another strong result from the Canadian-based software maker specializing in digitizing text. Results show that the trend of taking data into the cloud is alive and well, despite Covid-19. That’s good news for Open Text stockholders as well as all software investors.

Open Text (ticker: OTEX) reported 80 cents in per-share earnings from $827 million in sales for its fiscal fourth quarter, which corresponds to the second calendar quarter.

Wall Street expected 60 cents from $805 million in sales. Analysts estimates for the second quarter came down coming into the earnings report—as they did for many other companies—because the pandemic has had an impact everywhere. When the year began, analysts expected the company to earn about 75 cents in per-share earnings in the calendar second quarter. Open Text’s earnings actually beat prepandemic levels.

Open Text stock was up more than 5% in after-hours trading.

“Fiscal 2020 was a pivotal year for Open Text, highlighting that digital technologies are the key to business resilience,” CEO Mark Barrenechea said in the company’s news release. “Businesses that build digital capabilities will recover faster and emerge stronger from this pandemic.”

Recurring revenue came in at $658 million, up 18% year over year, growing faster than overall sales. Subscription-type sales have been another powerful trend in the software industry—as, or even more, important than cloud computing-trends. Subscriptions for software are replacing the regular upgrade cycle that once made software company sales more cyclical.

Barron’s wrote positively about Open Text in 2019, believing it was an undervalued software play. Since that story was published, Open Text stock is up more than 20%, better than returns of the S&P 500 and Dow Jones Industrial Average over the same span. Software components of the S&P 500, however, are up more than 60%. Open Text valuation remains below its software peers.

Year to date, Open Text stock is up about 4%. Again, that is a little better than major U.S. stock indexes, but lagging behind larger software peers in the S&P 500, which are up about 34%. The largest software component of the S&P 500 is Microsoft (MSFT). Its stock is up about 37% in 2020.

Wall Street likes Open Text shares, too. Almost 80% of analysts covering the company rate shares the equivalent of Buy. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 55%. What’s more, the average Buy-rating ratio for software stocks in the S&P 500 is about 60%—better than average, but not as high as Open Text ratings.

The average analyst price target is about $48, a little higher than where shares ended regular trading on Thursday.

Open Text management was conducting an earnings conference call that began at 4:30 p.m. Eastern time.

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