The world is digitizing at an increasingly rapid pace. As a result, growth rates at tech companies that are facilitating this transformation are skyrocketing. There aren’t many Canadian stocks to choose from for exposure to this booming trend. In this article, I will discuss two of them, Blackberry Ltd. (TSX:BB) and Open Text Corp. (TSX:OTEX). Let’s look into Blackberry and Open Text stock so we can decide which is the better buy today.
Blackberry stock remains a “show me” stock
There are two attributes that a so-called “show me” stock brings with it. The first is that the risk is higher, as it has not quite proven itself yet. The second one is that valuations are lower for these stocks. This stands to reason as there aren’t high expectations attached to these stocks. Blackberry’s (BB) stock price graph below clearly illustrates this point.
Blackberry definitely falls under this category. For the last few years, Blackberry has been focused on creating leading software for two fast-growing industries – the Internet of Things industry, which is all about machine-to-machine connectivity, and the cybersecurity industry. These industries each have their own strong growth drivers. And they both have strong, long-term growth trends.
But Blackberry’s financial results have been slow to ramp up. Part of this is due to the fact that the company has been undertaking a dramatic transformation away from handheld phones. These things take time. It’s also due to the fact that Blackberry has invested a lot of time and money into the “connected car” business. This business has massive multi-billion-dollar potential, but it’s still an emerging one. This explains Blackberry’s stock price underperformance, in my view.
Backlog is growing, providing signs of good times ahead
Current financial results have been disappointing. And investors are getting antsy. Although fiscal 2023’s earnings per share (EPS) came in above expectations, it was still a negative $0.18 per share. This is not something we like to see in a company that we invest in. As for me, I’m focusing on the fact that the results were significantly above expectations. And further that the business is starting to ramp up.
For example, in fiscal 2023, Blackberry’s auto software business (QNX) performed really well. It was a record year for design wins, and backlog hit a record high of $640 million. This is foreshadowing of future revenue growth. In fact, management’s guidance for this business is for revenue growth of 17% to 21% in the next fiscal year, with even stronger growth in the years after that. Accordingly, analysts have been increasing their estimates on the stock, which should result in strong performance from Blackberry’s (BB) stock price.
Open Text stock: strong momentum
As an information management company that offers software solutions that enable the digitization of companies, Open Text is seeing strong momentum. Simply put, the business is currently booming. Demand is strong and the environment remains extremely bullish. And Open Text’s (OTEX) stock price is starting to reflect this.
This can be seen in Open Text’s latest quarterly results. Revenue in the third quarter of fiscal 2023 increased 41% to $1.2 billion. Also, free cash flow came in at $306 million, or 25% of revenue. In a nutshell, the company broke records on all fronts as it reported its ninth consecutive quarter of growth.
Finally, management recently increased its outlook, raising its guidance for the year as the momentum continues to build. While the company has beat expectations in many recent quarters, the stock is pricing in a lot – it’s trading at 36 times trailing earnings.
So, when I compare Blackberry with Open Text, I am left thinking that they are very different. Open Text’s information management industry is a more established one, while Blackberry’s industries are emerging. Also, Open Text has proven that it can make good money off of its business, while Blackberry has not. Accordingly, Open Text’s stock price is reflecting a lot of good news, while Blackberry stock (BB) is not. Thus, my conclusion is that Blackberry has a lot more upside, along with its greater perceived risk.
Therefore, I think that Blackberry stock (BB) is the better buy.
