The Motley Fool

Should You Buy OpenText Stock Amid Its Recent Weakness?

Image source: Getty Images

Investing in growth stocks could be relatively risky, but can reap significant gains if entered at the right price. Top tech stock OpenText (TSX:OTEX)(NASDAQ:OTEX) has more than doubled in the last five years.

You might have read that this stock could be bought on dips given its stretched valuation. Well, this could be your chance. OTEX stock has fallen almost 10% since last week. Rising coronavirus impact has threatened the global economy, which weighed on the global financial markets recently.

Attractive valuation

OpenText stock has fallen approximately 10% since its 52-week high last week. Investors could consider adding or entering into this top tech growth stock amid this weakness.

Many would think this fall is small to consider as a correction. However, the stock is looking attractive from the valuation perspective. OpenText is trading 13.7 times its estimated earnings for the next 12 months.

This multiple is much lower than peer tech stocks’ average and its historical average valuation as well. Peer tech stocks such as Descartes Systems and Constellation Software are currently trading at sky-high valuations.

Earnings and dividends

OpenText Corporation continues to look attractive from the financial viewpoint. Its net profit averaged around 20% in the last 10 quarters.

It has managed to maintain gross profit margins at very high, above 70% levels in the same period.  OpenText management announced a restructuring plan last month, which will result in cost savings of $37 million to $41 million.

OpenText stock was uplifted by the company’s higher earnings in the last few years, returning almost 20% in the last 12 months. Management’s upbeat commentary and improving profitability will likely pave the path for its upward climb in the near future.

Its latest acquisition, Carbonite, though came at a significant premium, will also likely positively impact its earnings from next year. OpenText has a big potential of global expansion with Carbonite, as the later has operations primarily in the US as of now. How the acquisition benefits over the long term will be interesting to see.

While the company has managed an astounding growth both operationally as well as financially, it has mainly come from acquisitions. That said, successful and efficient integration will be the key challenge going forward.

OpenText pays attractive dividends as well. It’s currently trading at a dividend yield of 1.5%. Even if the yield is not that attractive, it’s fairly long dividend payment history and dividend growth makes it stand tall among peers.

It has increased per-share dividends by 16% compounded annually in the last five years. It should be noted that dividend growth plays an important role in investors’ total returns over a longer period.

In a nutshell

Lucrative valuation, higher expected earnings, and good-looking dividend profile make OpenText stock an attractive buy. The recent weakness in broader markets has brought down many top growth stocks.

Thus, this could be an apt time to start investing in tech stocks such as OpenText amid its recent weakness who are concerned about their inflated valuations.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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.

The Motley Fool recommends Open Text and OPEN TEXT CORP. Fool contributor Vineet Kulkarni does not have any positions in the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.