Investing in quality technology stocks can help you derive outsized gains over time. Typically, tech stocks are asset-light, allowing them to benefit from high operating leverage. However, tech companies need to invest heavily in research and development to stay ahead of the competition, as this sector is very disruptive.
One such TSX tech stock that has delivered stellar returns to shareholders is Open Text (TSX:OTEX). Valued at $13.5 billion by market cap, OTEX stock has returned 673% to shareholders in the last two decades. It also pays shareholders an annual dividend of $1.35 per share, translating to a forward yield of 2.8%.
So, if we adjust for dividend reinvestments, cumulative gains for OTEX investors are well over 800% since November 2003. Comparatively, the TSX index has returned 350% to shareholders in this period.
Let’s see if OTEX stock can continue to outpace the broader markets in 2023 and beyond.
Is OTEX stock a good buy now?
Open Text leads the US$200 billion information management market. It offers an enterprise-facing cloud-based platform of software solutions across verticals such as content, business networks, security, application modernization, and developer APIs.
It generates strong cash flows and enjoys high-profit margins, allowing it to pay shareholders a tasty dividend. OTEX initiated the dividend program in fiscal 2013 (ended in June) and has since returned over US$2.2 billion to shareholders via dividends. Moreover, these payouts have risen at an annual rate of 15% in the last 10 years.
Open Text aims to distribute just 20% of its free cash flow to shareholders in dividends, providing it with enough room to reinvest in growth projects, target accretive acquisitions, and strengthen the balance sheet.
With more than 120,000 enterprise customers and 150 million end users, Open Text operates in 180 countries. It ended the fiscal first quarter (Q1) of 2024 with revenue of US$1.43 billion and an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 34.7%.
Its sales were up 67.3% compared to the year-ago period, primarily driven by the acquisition of Micro Focus, which contributed US$563 million in the quarter.
Open Text aims to gain market share in the information management market and benefit from operational scale by automating workflows and leveraging artificial intelligence (AI) tools to drive synergies.
As its higher revenue and higher synergies translate to increased cash flows, Open Text expects to end fiscal 2026 with an adjusted EBITDA margin of almost 40% and US$1.5 billion in free cash flows.
What is the target price of OTEX stock?
Open Text ended Q1 with enterprise bookings of US$121 million, an increase of 8% year over year. Its cloud sales in the quarter rose 11.5% to US$451 million, while annual recurring revenue surged 59% to US$1.15 billion.
The company has grown its annual recurring revenue organically for 11 consecutive quarters and ended Q1 with annual recurring revenue of US$1.15 billion, which accounted for 81% of total sales.
Analysts tracking OTEX stock expect adjusted earnings to grow by 9.4% annually in the next five years. Priced at 11.5 times forward earnings, OTEX stock trades at a reasonable valuation given its earnings growth estimate and widening dividend payout.
