Down 24% From All-Time Highs, Is Open Text Stock a Good Buy Right Now?

Open Text is a tech stock trading at a massive discount to consensus price target estimates in 2024.

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Canadian tech stocks have been on an absolute tear in the past decade. For instance, iShares S&P/TSX Capped Info Tech ETF (TSX:XIT) has returned close to 500% since March 2014, much higher than the 318% gains of the Nasdaq Composite index. One stock part of the XIT ETF that has trailed the fund is Open Text (TSX:OTEX), which has returned just 132% in this period.

Valued at a market cap of $14 billion, OTEX stock is down 24% from all-time highs. Let’s see if this TSX tech stock can generate outsized gains in 2024 and beyond.

An overview of Open Text

Open Text offers a portfolio of software-based solutions on its enterprise-facing cloud-based platform. These solutions span across verticals such as content, business network, security, application modernization, and operations management.

Over the years, Open Text has increased sales via organic growth and accretive acquisitions. It generates strong cash flows and enjoys high profit margins due to an asset-light business model and recurring cash flows.

It initiated a dividend program in fiscal 2013 and has since returned over US$2.2 billion to shareholders in the last 11 years.

How did Open Text perform in fiscal Q2 of 2024?

Open Text experienced significant momentum in the fiscal second quarter (Q2) as it continues to accelerate investments in new-age capabilities such as artificial intelligence. In fiscal Q2 of 2024 (ended in March), Open Text reported revenue of US$1.3 billion, an increase of 71% year over year.

It was the 12th consecutive quarter of annual recurring revenue (ARR) growth in Q2 as record enterprise cloud bookings grew 63% to US$236 million.

Open Text’s acquisition of Micro Focus drove top line sales in the quarter as the latter contributed revenue of US$601 million in Q2. Further, Open Text aims to end fiscal 2024 with renewal rates in the high 80s. Open Text reported 48 cloud wins in Q2 with more than US$1 million in new contract value.

It reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of US$566 million, indicating a margin of 37%, while free cash flows grew 87% year over year to US$305 million.

Open Text pays shareholders a quarterly dividend of US$0.25 per share, translating to a forward yield of 2.6%. It means total dividends amounted to US$67.5 million in the quarter, indicating a payout ratio of less than 25%.

What’s next for Open Text stock?

Open Text expects cloud sales to range between US$5.85 billion and US$5.95 billion in fiscal 2024 as cloud bookings are forecast to surge between 25% and 30%, up from the previous estimate of 15%. The company is also raising the lower end of its free cash flow range to between US$800 million and US$900 million.

Open Text ended Q2 with US$1 billion in cash, which allowed it to repay $175 million of term loan debt in January. The tech giant now has total debts amounting to US$8.5 billion.

Priced at 8.5 times forward earnings, OTEX stock is really cheap, given analysts forecast earnings to expand by 14% annually in the next five years. Analysts remain bullish and expect OTEX to rise by 25% in the next 12 months.

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.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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