Several Canadian tech companies have reported upbeat quarterly financial results this month, but disappointing guidance for the year ahead has hammered share prices. Should investors bet on rebounds?
Open Text Corp. (OTEX-T) offers one of the earliest – and clearest – examples of this trend. The share price plummeted 14.8 per cent on May 3, even though the information management software company reported results that were roughly in line with analysts’ expectations and underscored a thriving business.
Total revenue increased by 16.3 per cent, year-over-year, and adjusted profit rose to 94 cents per share, up nearly 29 per cent from the same period last year. Management also said it would use US$2-billion in proceeds from an asset sale to pay down debt, which will enhance the company’s flexibility to make acquisitions, pay a dividend and buy back shares.
The problem that may have contributed to the stock’s dramatic sell-off: Open Text’s year-ahead outlook suggested that its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) will be about US$50-million to US$80-million lower than what had been expected, according to Richard Tse, an analyst at National Bank of Canada.
“That would suggest that either the former outlook was overly robust, or something has eroded in the core business,” Mr. Tse said in a note.
There have been other high-profile casualties during this reporting season for tech companies, highlighting that investors are tuning out actual performance and instead focusing on what management teams are saying about the coming year.
In another example, Docebo Inc. (DCBO-T) shares fell 23 per cent on May 10, after the company, which operates a cloud-based learning platform, reported its quarterly results.
Again, actual results looked okay: Revenue increased by 23 per cent, year-over-year, and profit margins expanded to 14.5 per cent, up 1.3 percentage points.
But management’s full-year outlook was the sticking point. The company expects revenue growth of 17 per cent to 18 per cent, which is considerably lower than the 22.5-per-cent growth that analysts had been expecting, on average.
In a third example, Telus International Inc. (TIXT-T) fell 18.7 per cent after reporting its quarterly results earlier this month. The IT services company, controlled by Telus Corp., offered an outlook that looks challenging, with projected revenue growth of just 3 per cent to 5 per cent.
To be sure, not all Canadian tech stocks have crumbled this reporting season. Those that have matched strong quarterly performance with a sunnier outlook have rewarded investors with rallies.
Lightspeed Commerce Inc. (LSPD-T) on Thursday gained 18.3 per cent after the payments technology company reported that revenue rose 25 per cent during the quarter. It said it would deliver adjusted EBITDA of at least US$40-million over the coming year, up from US$1.3-million during its just-completed fiscal year, as the company refocuses its attention on profitability.
If this looks like a Wild West of stock market activity, it is. With tech stocks soaring – or tumbling – by double-digits in a single day of trading, the sector is looking like the domain of investors who are comfortable with a lot of risk.
The other takeaway is that with corporate guidance swinging wildly from one quarter to the next, even top executives may be at a loss to explain how their companies are faring as they try to balance growth prospects against rising demands from investors to show profits.
This lack of clarity is now weighing on some stock valuations.
Telus International has swung from a premium relative to its peers – in terms of enterprise value to EBITDA – to a valuation that lines up with its competitors. And Mr. Tse believes that the sell-off in Open Text reduces the stock’s valuation to a level that may be far more attractive to investors.
Shares that have fallen sharply over the past couple of weeks are now reflecting considerably lower market expectations, setting up potential rebounds in the months ahead if the outlook improves again.
Even though a number of analysts have slashed their target prices on Open Text – where analysts expect the share price to be within 12 months – the reduced targets still imply tidy gains.
Stephanie Price, an analyst at CIBC Capital Markets, trimmed her target price on the stock to US$38.50 from US$44 (the shares trade in Toronto and on the Nasdaq), implying a gain of about 25 per cent from the current price. She maintained a “neutral” recommendation, which is the equivalent of “hold.”
Nonetheless, the bout of tech stock volatility can’t be good for investor sentiment. When stocks can sink 15 per cent in one day, it may be a sign that investors are utterly confused.
David Berman