FTSE 100 tech giant Micro Focus International (LSE: MCRO) stunned the market on Monday with a profit warning that saw its shares plunge dramatically from around 1,900p to 1,000p, a decline of nearly 50%. What went wrong and is now the time to buy the stock?
Second profit warning
The profit warning was the second in the space of just a few months for Micro Focus. Back in January, when the group released interim results, it advised that sales were likely to fall between 2% to 4% for the year ending 31 October. However, this week’s trading update revealed that the year-on-year revenue decline has been “greater than anticipated” and that sales are now more likely to fall between 6% to 9%.
The company, which recently paid a huge $9bn for Hewlett Packard Enterprises’ (HPE) software business, blamed the revenue decline on issues relating to its new IT system implementation, poor performance of sales personnel due to integration/system issues and disruption of ex-HPE customer accounts. CEO Chris Hsu stepped down with immediate effect, with COO Stephen Murdoch taking on the top job.
It’s not often that you see an £8bn market cap FTSE 100 company lose half its value in the blink of an eye, but that’s what happened on Monday. The market is in an extremely unforgiving mood right now, with many profit warnings being punished harshly, especially when debt levels are high. So is now the time to grab a bargain?
While Chairman Kevin Loosemore advised on Monday that the firm remains confident in its strategy, personally, I’m not a buyer of the shares at current levels. High debt ($4.2bn on the balance sheet at 31 October) from the HPE acquisition adds considerable risk to the investment case, and it sounds like the company is really struggling with the HPE acquisition. I’ll be sitting on the sidelines for now, waiting to see if Micro Focus can turn things around.
Another tech stock I won’t be buying is Accesso Technology (LSE: ACSO), which designs virtual queuing systems for amusement parks and other similar attractions. Operating in 27 countries around the world, Accesso’s solutions drive increased revenue for attraction operators while also enhancing the guest experience.
Unlike Micro Focus, Accesso is generating some pretty strong growth right now. Preliminary results this released this morning showed a 30% rise in revenue to $133.4m, a 22% climb in adjusted operating profit, and a 10% increase in adjusted earnings per share at 56.7 cents. Chairman Tom Burnet was bullish in his outlook, commenting: “I am excited by where we are as an organisation, and I see enormous growth opportunities in our future.”
While the growth story here looks exciting, the valuation of the stock just looks a little too high for my liking at present. The shares have risen around 25% over the last six months and with City analysts expecting earnings of 74 cents per share this year, the forward-looking P/E is now a high 43. With that in mind, Accesso is going on my watchlist for now. I could be interested in the stock if we see a pull-back.
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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.