Canadian information management giant Open Text (TSX:OTEX) stock snapped from an 11-month losing streak in October 2022 to post a 63% gain by July this year. Shares have lost some momentum since then; however, Open Text stock retains a 17.4% gain for the first nine months of 2023. Long-term-oriented investors may wish to grab the undervalued stock, as it undergoes a consolidation before artificial intelligence (AI) gains and integration efforts fuel another rally.
Open Text closed a great fiscal year 2023
Open Text is a $12.6 billion Canadian technology stock that closed a great financial year in June. The company saw strong demand, won market share from competitors, reported strong revenue growth, generated significant free cash flow, and closed a key US$6.2 billion acquisition of Micro Focus in fiscal year 2023.
The January acquisition of Micro Focus was the largest single acquisition in Open Text’s history that boosted its AI prowess, effectively doubled its industry footprint, and expanded its total addressable market (TAM) to new areas, including enterprise security and application automation, while deepening its presence in Europe, making Open Text stock fundamentally more valuable.
Open Text’s integration of Micro Focus and organic growth powered the company to a new revenue record of US$4.48 billion, up 32.2% in constant currency. A decade-long migration to cloud revenue remains underway to grow the company’s recurring revenue, which reached 81% of total sales by June this year. The company’s future revenue is more visible today, and so are its earnings and cash flows.
What’s more, Open Text generated a strong free cash flow of US$655 million (15% of its revenue) during the past 12 months. The company retains a significant capacity to pay down the new debt accumulated in the recent acquisition, increasing its common stock investors’ residual interest in the business.
Should you buy Open Text stock now?
A recent consolidation on Open Text stock offers a profitable opportunity for investors with a long-term view to grab cheaper shares and earn positive returns from two key sources: capital gains and growing dividends.
Open Text is a cheap tech stock that could generate organic growth through deep investments and AI integration with its widely used platforms. The company invested more than US$680 million in Research and Development (R&D) in fiscal year 2023. Management targeted spending 12-14% of revenue in R&D in a 2022 annual report. The target has shifted to “14% to 16% of revenue” in the latest annual report for fiscal year 2023, which closed on June 30 this year. Organic growth could be significant going forward if customer demand remains as strong as management recently reported.
Bay Street analysts project a strong 32% growth in the company’s revenue and a 44% surge in normalized earnings in the fiscal year 2024. Micro Focus integration will be a key growth driver, and so could increased customer uptake of Open Text’s AI-powered technology platforms.
Despite a positive run in 2023, Open Text stock remains cheap today. The company’s enterprise value-to-earnings before interest, taxes, depreciation, and amortization multiple of 7.95 remains far below its five-year average of 10.7. Stronger earnings, higher cash flow, and sustained revenue growth may lift valuation multiples back towards historical averages during the next 12 months, unlocking capital gains for investors.
Most noteworthy, Open Text pays a quarterly dividend that currently yields 2.8% annually — another layer of return for stock investors. Bay Street analysts project a 3% dividend raise for 2024 and a 10% raise in 2025. Basically, if analyst estimates come true, the Open Text dividend yield could quickly and easily surpass 3% and be increasingly more meaningful to investors who buy OTEX stock now.
