Several Canadian tech companies have reported positive quarterly results this month, but disappointing outlooks for the year ahead are weighing on stock prices. Should investors bet on a rebound?
Open Text Corp. (OTEX-T) provides one of the earliest and clearest examples of this trend. The stock price plummeted 14.8% on May 3, even though the information management software company reported financial results that were broadly in line with analysts' expectations and supported a thriving business.
Total revenue increased 16.3% year over year, and adjusted earnings were 94 cents per share, an increase of approximately 29% year over year. Management also said it would use $2 billion in proceeds from asset sales to pay down debt, giving the company more flexibility to make acquisitions, pay dividends and buy back stock.
Issues that may have contributed to the dramatic decline in stock price: OpenText's future outlook is for adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to be approximately 50 million to 8,000 yen lower than in the prior year. It was suggested that it would be lower than USD 10,000. That was expected, said National Bank of Canada analyst Richard Tse.
“This would suggest that either the previous outlook was too strong or that something has eroded into the core business,” Tse said in a note.
There have been other big casualties this reporting season for tech companies, as investors tune out their actual results and instead focus on what management is saying about next year. That became clear.
In another example, Docebo Inc. (DCBO-T) stock fell 23% on May 10th after the cloud-based learning platform operator reported quarterly results.
Again, the actual results looked good. Sales increased by 23% over the previous year, and profit margin increased by 1.3 points to 14.5%.
However, management's full-year forecast became a bottleneck. The company expects sales growth to be 17% to 18%, well below the average 22.5% growth expected by analysts.
In a third example, Telus International (TIXT-T) fell 18.7% after reporting its quarterly results earlier this month. The IT services company owned by Telus Corp. gave a grim outlook, with sales growth expected to be only 3% to 5%.
To be sure, not all Canadian tech stocks tanked this earnings season. Companies that matched strong quarterly results with positive outlooks sparked a rally among investors.
Lightspeed Commerce Inc. (LSPD-T) rose 18.3% on Thursday after the payments technology company reported a 25% increase in revenue for the quarter. The company said it will generate adjusted EBITDA of at least US$40 million next year, up from US$1.3 million in the just-completed financial year, as it refocuses on profitability.
If this may seem like the wild west of the stock market, you're right. With tech stocks soaring or falling by double digits in single-day trading, the sector is looking like the realm of investors willing to take on a lot of risk.
Another point is that as corporate guidance fluctuates wildly from quarter to quarter, even top executives trying to balance growth prospects with increasing demands from investors to demonstrate returns are struggling to explain their company's situation. This means that you may be confused.
This uncertainty is currently weighing on some stock valuations.
Telus International has moved from a premium to its peers to a valuation that is on par with its competitors, from a valuation to EBITDA perspective. And Tse believes OpenText's decline will lower the stock's valuation to a level that is much more attractive to investors.
Shares, which have fallen sharply over the past few weeks, now reflect a sharp decline in market expectations and could rebound in the coming months if the outlook improves again.
Even though many analysts have lowered OpenText's price target (analysts expect the stock to be within 12 months), the target reduction still suggests a sizable profit.
CIBC Capital Markets analyst Stephanie Price lowered her price target on the stock to $38.50 from $44 (the stock trades on the Toronto and Nasdaq), predicting an upside of about 25% from the current price. suggested. He maintained a “neutral” recommendation, equivalent to a “hold.”
Nevertheless, increased volatility in tech stocks is unlikely to have a positive impact on investor sentiment. If a stock price can drop as much as 15% in a single day, that could be a sign that investors are completely confused.
