3 technology stocks to buy

In a round-up of ‘street’ reviews of technology stocks, The MoneyLetter recently featured sellers of enterprise content management, supply chain management and business solutions.

Open Text Corp. (TSX—OTEX; NASDAQ—OTEX)

CIBC World Markets analyst Stephanie Price asserts that technology stock Open Text Corp. sits in an enviable competitive position, with “our industry survey suggesting that the company has a sticky customer base that has prioritized enterprise content management (ECM) spending”. Ms. Price sees Open Text as well positioned to benefit from the current competitive environment and increased spending on remote work applications and security. With the stock trading at a significant discount to peers, she retains her ‘Outperformer’ recommendation and US$56.50 share price target.

Ms. Price comments: “Our survey suggests that ECM remains a mission-critical spending area throughout the pandemic. The majority of respondents view the transition to remote work as driving an increased need for robust ECM and data-security solutions, while viewing the competitive environment as roughly unchanged.

“Perhaps the most surprising finding from our survey is that SharePoint (not FileNet) appears to be Open Text’s biggest competitor. Of the survey respondents, 75 per cent report using SharePoint in some capacity for ECM. However, over half of SharePoint users have multiple ECM providers, suggesting that firms that require more product breadth and/or integration with non-Microsoft solutions (such as ERP (enterprise resource planning) providers) may engage independent ECM providers. Sixty-six per cent of respondents using Open Text pair its solutions with SharePoint.

“Open Text is number two in market share amongst our respondents, with 30 per cent of survey participants using Open Text. Respondents like Open Text’s integration capabilities and the breadth of the solution set. Public perception of Open Text’s competitive positioning appears to be strengthening, with 90 per cent of respondents noting that Open Text has maintained or improved its competitive position over the past 12 months.”

Open Text develops enterprise information management (EIM) solutions, which enable companies to control and better utilize all forms of information.

Kinaxis Inc. (TSX—KXS)

Companies are increasingly looking to tighten their supply chain, pandemic or not, and among those benefiting from the search for the perfect supply chain is industry leader Kinaxis, which counts large and small caps among those that have been looking to it for advice on supply chain management. Kinaxis closed the US$60 million Rubikloud Technologies acquisition in early July, and has since started integrating the company into its operations. Rubikloud should enhance the RapidResponse offering in consumer packaged goods (CPG) and allow the company to enter a new vertical—retail, where it has several enterprise-class customers.

PI Financial analyst Gus Papageorgiou maintains his ‘Buy’ rating and gaudy $250 target share price.

As the Rubikloud acquisition ticks many boxes, the analyst further details: “The Rubikloud acquisition has helped Kinaxis improve its current product offering and value proposition to current customers and to enter new verticals. As such, the acquisition can be classified as both offensive and defensive.

“While management stated Kinaxis was not directly competing with Rubikloud, the latter kept surfacing in the CPG market and had solved many challenges that Kinaxis had not. Specifically, Rubikloud arsenal allows Kinaxis to enhance its demand-predicting capabilities for its CPG vertical, using its AI technology.

“The acquisition also increased Kinaxis’ total addressable market in a significant manner, as management has identified over 700 prospective customers in a new vertical—retail. Management also sees Rubikloud’s solution as being applicable to the life sciences vertical. Because Rubikloud also served verticals that Kinaxis was currently in (CPG) and allowed the company to enter new verticals, the rationale became very compelling. It also did not escape management’s attention that Rubikloud had attracted large enterprise-class retail customers.”

The analyst also commented on the company’s potential for a US stock listing, maintaining: “Currently, the company meets all the requirements of listing in the US and although it would welcome additional liquidity that such a listing would bring, management would prefer to list in conjunction with an equity offering. Kinaxis has a robust balance sheet with over US$260 million in cash, and apart from a large acquisition or investment, it currently does not need additional funds.

“We note that Kinaxis is not currently hindered by not being dual listed, as management is seeing an increase in its foreign investor base, and its valuation reflects this.”

Kinaxis operates a SaaS model focused on supply chain management. Its solution, RapidResponse, allows organizations to run scenarios on their complex supply chains to make better and faster decisions. Customers include Toyota, P&G, Ford, Honeywell, and Qualcomm.

Converge Technology Solutions Corp. (TSXV—CTS)

Converge Technology Solutions—a national platform of regionally focused Hybrid IT solution providers in the US and Canada—showed off its growing revenue in its second-quarter 2020 results.

Revenue for the quarter grew 44 per cent to $228 million from last year’s second quarter, beating Raymond James Financial analyst Steven Li’s estimate of $222 million. Recurring revenue (a key facet of a technology company is its ability to generate a stable flow of recurring revenue) expanded by 200 basis points to 22 per cent of total revenue compared to the last quarter. According to Mr. Li’s calculations, recurring revenue hit $205 million when counting the past four quarters. It’s up eight per cent from this time last year.

Free cash flow (FCF) this quarter amounted to $22.4 million (up from $12.5 million last year), growing its FCF for the first six months of 2020 to $52.1 million. The analyst also calculated an adjusted FCF after debt service, earn-outs, and taxes amounted to about $14 million and about $34 million for the first half of 2020. The company blows away the competition when it comes to FCF yield, with 42 per cent over the past 12 months, while its European and North American competitors’ average 11 per cent.

In his Outperform thesis, Mr. Li points out that Converge Technology is a “high-risk” play in the technology sector, namely due to its high net debt level of $153 million. The analyst expects EBITDA of $58 million and $79 million for 2020 and 2021, which wouldn’t be enough to repay that debt in those two years.

However, this debt presents something of an opportunity, since the company appears to be trading at a discount versus its Canadian peers, such as Pivot Technology Solutions Inc. (priced at about $1.87 a share) that has a -2 per cent FCF yield (versus CTS’s aforementioned 42 per cent yield). Mr. Li calculates a target price of $2.35 a share for Converge Technology.

It’s also worth noting that the technology company is the winner of Ingram Micro Cloud’s 2020 Re-seller of the Year Award for North America. These annual awards spotlight Ingram Micro Cloud partners worldwide. Despite being a high risk, Mr. Li rates Converge a Buy.

This is an edited version of an article that was originally published for subscribers in the September 2020/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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