In early December, I wrote about my favourite tech stocks entering 2019. On that list was OpenText (TSX: OTEX)(NASDAQ), which I considered to be one of Canada’s best valued tech stocks. Year to date, OpenText’s stock is up 10% which is a great start to the year. Despite the stock’s double-digit gains in 2019, it still provides excellent value.
Strong second-quarter results
Outside of a broader market rebound, OpenText’s strong second quarter earnings played a large part in the company’s share price jump. In the second half of the year, concerns were mounting with respect to OpenText’s ability to grow. Growth appeared to be slowing and analysts were only expecting low to mid-single digit growth in 2019.
Second-quarter results quickly dispelled this notion. Although revenue and adjusted earnings per share only grew 3% year over year, cash flow jumped by almost 14%. Why is this important? As the company generates more cash, it can then redistribute to future acquisitions. As a reminder, OpenText is a serial acquirer relying on acquisitions to spur double-digit growth.
Case in point: the company announced that it had deployed approximately $386 million in cloud-based acquisitions. It also announced 10 new customer wins and entered into a partnership with Google Cloud to deliver and Enterprise Information Management (EIM) system. None of these have yet to have a material impact on financial results, but that will be key revenue drivers moving forward.
The end result? The company is positioned for a strong 2019 and analysts have been revising estimates upwards.
A top tech stock for value
OpenText is now trading up 17% from its 52-week low and is only 6% off its 52-week high — one that is should easily surpass in 2019. Analysts are unanimous in their coverage of the company as all rate the company a “buy.” Likewise, they have a one-year average price target of $58.50 on the stock, which implies 20% upside from today’s share price.
The company is still trading below historical averages and at an in industry-leading price-to-earnings (P/E) to growth ratio. As the tech industry rebounds from a dismal fall, OpenText is trailing the TSX Technology Index‘s 14% gain. It won’t be long before investors catch on to OpenText’s value.
Foolish takeaway
The company has been a Canadian tech darling for years. Although slowing growth might be a concern, it has plenty of cash to deploy. As we have seen in the past few months, it can quickly make use of its cash and achieve higher than expected growth rates. Estimates only include the information analysts have on hand. Any future acquisitions cannot be accounted for and are thus only included in revised estimates. Given the company’s reliable history, expect it to outperform the TSX.
