Shares of Open Text (TSX:OTEX) rose 11% in January, with the cloud-based company announcing and finalizing the acquisition of Micro Focus.
Open Text stock announced it was planning on the acquisition about a month ago as well, leading to an increase in the share price. Yet this also came along with a rise in tech stocks and the markets in general. So, is this stock bound to continue growing after the news? Or is a fall perhaps on the way?
The Micro Focus acquisition
Let’s take a look at the Micro Focus acquisition to see why investors are excited about it. The acquisition was finalized on Jan. 31, with the plan to bring in a “new generation of information management software” to “help organizations accelerate their digital transformation and drive growth while reducing costs,” said Chief Executive Officer Mark J. Barrenechea.
Those costs include US$400 million in cost synergies, balanced also through an 8% workforce reduction. More updates are set to come out this week, when Open Text stock announces its second-quarter results on Feb. 2. And investors certainly should be interested, as the price wasn’t cheap. The total acquisition came in at about US$5.8 billion, which included cash and debt from Micro Focus.
Micro Focus is expected to up fully operational within the next six full quarters, if not sooner, the company said.
So what?
Analysts haven’t really weighed in heavily over the Micro Focus acquisition yet. However, before the acquisition was fully operational, they did continue to state that Open Text stock has the history and balance sheet to warrant a strong investment.
Open Text stock continues to drive profit and strong recurring cash flow, even in today’s challenging environment. It has plenty of “defensive attributes,” according to one analyst, and they continue to see the company growing its base through acquisitions, such as Micro Focus and perhaps others in the future.
After creating so many partnerships with some of the biggest tech stocks out there, the company now has to follow through. That’s why you should care about the Micro Focus acquisition. This helps the company step up to the plate and perhaps take on even more heavy-hitting clients in the near future.
And as it expands, that means even more returns for investors.
Yet growth is not reflected!
Despite all this positive news, analysts believe the future growth is not reflected in the stock price of Open Text stock. The company may be up 11% in the last month, but it’s still down about 25% in the last year. And this is just from being a tech stock in the wrong place at the wrong time.
Now, I’m not saying the stock is cheap. Open Text stock currently trades at 61 times earnings right now, after all. However, it has a solid history of growth behind it, and this new acquisition, coupled with recurring revenue, add up to a solid future as well.
So, with a 2.96% dividend yield, and 261% growth in shares over the last decade, investors can bring in a potential compound annual growth rate (CAGR) of 13.69%. All while picking it up while shares are still far below fair value, according to analysts.
Bottom line, I would certainly pay attention to earnings on Feb. 2.
