Can OpenText (TSX:OTEX) Restart Its Growth Engine?

Investors should keep a close eye on Open Table’s (TSX:OTEX) strategy over the course of 2019., according to Vishesh Raisinghani

| More on:

By the end of the January, OpenText Corporation (TSX:OTEX)(NASDAQ:OTEX) will declare its second quarter results. Analysts and investors will, no doubt, be closely watching to see if the company can ignite a fresh growth spurt to address the recent slowdown.

Cloud computing service provider OpenText is a formidable force in the Enterprise content management (ECM) space, where it has more market share than IBM. ECM software essentially allows companies to manage all their cross-platform documents on the cloud, so an old Word file from Tim in account is readable by Jenny in management regardless of their devices and operating systems.

OpenText also offers other services for online education programs and consulting services, but those are much less interesting.

Addressing its niche has helped OpenText double its annual sales over the past six years. However, growth seemed to be slowing to low single digits in the first half of 2018. Now investors want to know if the company can keep growing at the same relentless pace as before.

Last quarter’s results were lackluster. Revenue was up 4% year-on-year, while net income was nearly flat. Unsurprisingly, the stock price is also flat over the past year.  

To the management’s credit, they realize something is amiss and have outlined a new strategic vision to get the company growing again. According to CEO Mark J. Barrenechea, the company has a solid base of recurring income derived from a diversified group of clients from around the world.

Growth over the past six years has been fueled in part by acquisitions. The company has deployed a total of $4.8 billion over this period to buy new companies. Revenue from the cloud division is up eightfold as a result. CEO Barrenechea says investors should expect more big-ticket acquisitions in the near term.

Acquisitions could pave the way for OpenText to enter trendier, faster-growing sectors like artificial intelligence, internet-of-things (IoT), cyber security, and software-as-a-service (SaaS). This wider market is expected to be worth over $100 billion according to the company’s own estimates.  

The recent acquisition of Liaison Technologies, a provider of cloud-based application integration and data management solutions with 100% cloud-based recurring revenues and strong renewal rates, for $310 million in December 2018, is a great example of where the company is heading over the next few years.

Management claims these acquisitions, coupled with internal cost-saving tweaks to the business, could help them achieve $1 billion in cash flow from operations and a gross margin of 40% by 2021.

Investors should keep a close eye on the stock to see how this strategy pans out over the course of 2019. The stock currently trades at a much lower forward price-to-earnings (PE) ratio than many of its peers (expect IBM) and offers a 1.7% dividend yield. The company’s market capitalization is a little over $9 billion. 

If you’re optimistic about the company’s prospects and agree with the strategic vision, this might be a great time to enter the stock. By most traditional measures, it is undervalued

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool owns shares of OpenText. OpenText is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

4 Ways to Grow $100,000 Into $1 Million in Retirement Savings

Anyone can build a million-dollar retirement portfolio. Here are four ways you could practically grow $100,000 to $1 million.

Read more »

A shopper makes purchases from an online store.
Dividend Stocks

3 Reasons to Buy TFI Stock Like There’s No Tomorrow

TFI stock (TSX:TFII) had a hard 2023, but now it's set up for a solid 2024, with an acquisition that…

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

5 Secrets of TFSA Millionaires

These lesser-known secrets can help you set up the perfect long-term portfolio and achieve a million-dollar TFSA!

Read more »

analyze data
Dividend Stocks

How to Build a Powerful Passive-Income Portfolio With Just $20,000

These fundamentally strong TSX stocks have paid and increased their dividend in all market conditions. Add these stocks to build…

Read more »

Canadian stocks are rising
Dividend Stocks

iShares S&P/TSX Capped REIT Index ETF (TSX:XRE): Why I Like this ETF Better Than a Rental Property

XRE is a great ETF for gaining exposure to the Canadian real estate sector.

Read more »

Payday ringed on a calendar
Dividend Stocks

3 High-Yield Dividend Stocks That Pay Cash Every Month

These three dividend stocks all offer high yields and have sustainable dividends, making them some of the best investments to…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

3 Stocks That Could Create Lasting Generational Wealth

If you want to start transferring over your wealth, you'll need to actually have some! And these are three stocks…

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

Down by 25%: Is Canadian Tire Stock a Buy in February 2024?

Take a closer look at this Canadian retail stock if you are looking for low-cost additions to your self-directed portfolio…

Read more »