OpenText Stock Plunges 19%, But Investors Are Missing This Key Growth Metric

OpenText (TSX:OTEX) shares lost 19% after earnings. Despite hitting estimates, the stock provided a weaker outlook for the year ahead.

| More on:
Man holding magnifying glass over a document

Image source: Getty Images.

OpenText (TSX:OTEX) earnings provided little in the way of exciting investors during their third quarter report. In fact, soft full-year outlooks for 2025 led to a drop in share price by 19%. 

However, despite hitting all targets, there is still some momentum underway. Today, let’s go over what investors might be missing in terms of OpenText stock and why it could still be a great time to buy.

What happened?

OpenText stock reported earnings that fell in line with estimates, with a strong overall third quarter. Total revenue came in at $1.45 billion, with annual recurring revenue at $1.15 billion as well. Cloud revenue hit $455 million, with free cash flow of $348 million as well.

Part of the growth came from the divestiture of assets that added a surge of cash to the company’s bottom line. Now that it’s complete, the company hopes to be more flexible, and expects to start up its merger and acquisition strategy once more after the focus on organic growth.

“OpenText is focused on growth, profitability and the future of Information Management. The divestiture of our AMC/Mainframe business is now complete, and we are using the net proceeds to repay $2 billion of debt,” said chief executive officer (CEO) mark J. Barrenechea. “With our increased capital flexibility, we are pleased to announce a new capital allocation program, continuance of our dividend program, and a new $250 million share buyback.”

What investors are missing

One thing I like to do when looking at earnings is to look at momentum. Already I like the fact that OpenText stock is putting that $2 billion towards debt. But more than that, the company has been seeing rapidly expanding organic growth as well as growth across much of its earnings quarter after quarter.

For instance, during the first quarter of 2024, total revenue was $1.43 billion, with annual recurring revenue of $1.15 billion. Cloud revenue was $451 million, with free cash flows of $10 million.

By the second quarter, this had improved to record results. Total revenue hit $1.54 billion, with annual recurring revenue holding steady at $1.15 billion as well. Cloud revenue came down slightly to $450 million, with free cash flows surging to $305 million.

OpenText stock has been focused on bringing down debt and increasing organic growth. This has left overall performance steady, though revenue did come down in the last quarter. Recurring revenue, however, remained intact, with an increase in cloud revenue and free cash flow.

Bottom line

Overall, OpenText stock has done a solid job in strengthening its balance sheet so it can get back to what it does best. That’s acquire businesses, and attract large clients — clients such as Alphabet and Ulta Beauty. The company remains a “buy” from most analysts., especially those who have an eye towards the future.

What’s more, the company is now focusing on growth once more. This should help create a demand for shares, especially when the company reports its full-year earnings in the next few months. So, keep an eye on OpenText stock, as it’s one of the tech stocks offering recurring revenue and could set investors up for life.

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 Amy Legate-Wolfe 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.

More on Tech Stocks

Target. Stand out from the crowd
Tech Stocks

CGI Stock: A Heavy-Hitter That Just Jumped 4%

Shares of CGI stock (TSX:GIB.A) rose after seeing stronger results that put the acquisition tech stock back on the top…

Read more »

Business success with growing, rising charts and businessman in background
Tech Stocks

Topicus Stock is Down 10% as Earnings Fall Short of Estimates

Topicus stock (TSXV:TOI) is down 10% from 52-week highs, and earnings didn't help. But now could be a perfect time…

Read more »

Family relationship with bond and care
Tech Stocks

Pensioners: Should You Take CPP Payout at 60?

You can collect your CPP payout anytime between 60 and 70. While the average retirement age is 65, circumstances may…

Read more »

edit Businessman using calculator next to laptop
Tech Stocks

If You’re Not Using This Investing Tactic, You’re Missing Out on Future Wealth

After paying a hefty tax bill, you realize the importance of being tax-free. Here’s an investing strategy for a tax-free,…

Read more »

healthcare pharma
Tech Stocks

Down 61% From Record Highs, Can Well Health Stock Recover in 2024?

Well Health has crushed broader market returns since its IPO and continues to trade at a discount to consensus price…

Read more »

A bull outlined against a field
Tech Stocks

3 No-Brainer Stocks to Buy Before a Bull Run

Given their healthy growth prospects and attractive valuation, I am bullish on these three stocks ahead of the next bull…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

Up 57% From its 52-Week Low, Is Shopify Stock Still a Buy?

Shopify (TSX:SHOP) stock is up 57%, but the company fell earlier this year. What could happen as we head into…

Read more »

Man data analyze
Tech Stocks

Is Shopify Stock a Buy Before its Q1 Earnings?

Down over 50% from all-time highs, Shopify stock has significant upside potential given consensus growth estimates.

Read more »