Micro Focus: A Tech Stock to Watch

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Micro Focus has been a superstar stock for some time now with the share price locked in a stellar uptrend since mid-2011.

Wednesday (14th December), management delivered yet another bullish update and on the back of this prices gapped higher at the open and closed the day up 4.2%.

The 75% increase in interim dividend and 15% year on year growth in pre-tax profit invariably took the headlines. However, the impact of the acquisition of Serena Software Inc. and its subsidiaries means that a deeper delve is needed.

Key takeaway’s from H1 Update

Importantly, management reported that the high profile takeover of the software arm of Hewlett Packard (HP) remains on track to complete in Q3 of 2017.

Looking at the numbers on a constant currency basis and adjusting for M&A does not spoil the party. On this basis, first half revenue grew 1.2%, adjusted EBITDA 7.8% and adjusted EBITDA margins increased from 44.5% to 46.8%.

Combined with the positive impact of the Serena Software acquisition it’s no wonder that prices rallied like they did. See below for Micro Focus’ 9 Month Daily Candle Price Chart:

So Where Does This Leave Us?

Taking a step back you would be forgiven for thinking that the bullish price momentum witnessed following the announcement of the HP takeover had fizzled out.

However, comparing the performance of Micro Focus to the FTSE 350 Software & Computer Services Index over this period shows a different picture. Up until mid-November Micro Focus performed in line with the peer group, but from mid-November onwards Micro Focus showed clear relative strength.

Given this we were unsurprised to see the company deliver a bullish H1 update yesterday.

Where Next?

Looking at the price chart we can see that Wednesday’s gap higher was from an intense period of price compression. With prices coiling in a tight trading range for four days prior to this the decisive directional move was far from a surprise.

With prices holding held their gap yesterday many called the start of another powerful up leg. However, despite the scope for prices to rally higher two clear resistance levels remain overhead -the October swing high of 2,267p and the multi-year high of 2,400p.

Moreover, yesterday’s and Wednesday’s strong performance meant prices were also overextended versus their 20 day exponential moving average.

Despite today’s weak start, Micro Focus’ bullish fundamental backdrop and powerful longer term uptrend means the stock remains firmly fixed on our watch list.

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