The Micro Focus (LSE:MCRO) share price has been on a downward trajectory since 2017, decreasing by more than 75%. But recently, it started to climb again. Over the last year, the Micro Focus share price has risen by 43%. And over the last six months, the growth is closer to 115%.
What caused this recent surge? Why did the stock price fall in the first place? And should I be adding this business to my growth portfolio?
Micro Focus’s land-sliding share price
Micro Focus is a software and technology company. It serves over 40,000 customers worldwide and provides software solutions designed to assist in operating digital infrastructure. This includes application delivery, cyber-security, and AI-driven analytics. It currently has a portfolio of over 300 products that suit the needs of various industries, including pharmaceuticals, aerospace, and telecommunications.
This vast collection of products has expanded over time, thanks to a series of strategic acquisitions. And at one point, Micro Focus was the UK’s largest technology company. So what went wrong?
Acquisitive growth strategies are risky and Micro Focus learned the hard way. In 2017 it completed the acquisition of Hewlett Packard Enterprise’s software business for $8.8bn. Unfortunately, the deal, which was supposed to propel Micro Focus into a new growth era, turned into a disaster.
The integration process was not as seamless as initially predicted and led to an additional $960m of exceptional expenses. What’s worse, since acquiring the business, total revenue has been declining at an alarming rate. Needless to say, this isn’t good news and appears to be the primary catalyst for Micro Focus’s collapsing share price. But is the company making a comeback?
Reasons to be cheerful
To fix the problems introduced with the Hewlett acquisition, the management team initiated a turnaround plan. Recently this has seemed to be having a positive effect. While total revenue is still falling, Micro Focus has slowed the fall faster than expected by analysts.
The firm reported a massive $2.97bn loss for 2020. However, $2.8bn of that was a goodwill impairment charge, confirming that it overpaid for the Hewlett acquisition. This is a one-time expense, and if its effects are ignored, the company is at a similar level of underlying profitability as 2019.
What’s more, its cash conversion ratio has increased from 0.95 to 1.13, indicating that internal investments are generating higher cash flows.
This is good news. I feel. And it makes the recent boost to Micro Focus’s share price understandable.
The bottom line
Overall, I think the worst might have passed, and it looks like the firm is finally getting back on track. Therefore, I believe the Micro Focus share price can continue climbing over the long term.
But there is still a problem that has yet to be resolved — its debt. Today, the market capitalisation of Micro Focus is around £1.7bn. But its total debt sits closer to £4.9bn courtesy of the Hewlett acquisition. While the next loan maturity isn’t due until June 2024, that is still a massive bill that the company might struggle to pay in its current state.
And so, for now, I’m going to wait and see how Micro Focus performs in 2021. Therefore, I’m not adding the stock to my portfolio today.
