OpenText Corp (TSX: OTEX) stock went on a surprise rally in August, rising 16% when the S&P/TSX Composite Index gained only 5.7%. It was a period of significant outperformance for OTEX, one of Canada’s best-known and oldest software companies. Recently, the company got into artificial intelligence (AI) in a major way, investing considerable sums of money in integrating generative AI into its apps. Investors seem to think that the investment is paying off, as the stock has been rallying this year (following some less successful performances in years past).
That’s not to say that AI is the only thing that is driving gains for OTEX. To the contrary, the company has put out a lot of good news in other categories as well. For example, it recently increased its dividend and announced a new $300 million buyback program. These shareholder-friendly moves piqued investor interest and likely helped get OTEX stock moving.
The question is whether OTEX stock is still a buy today. Although the company’s recent announcements were bullish catalysts, OpenText does not exactly have a stellar track record of long-term growth. In fact, the company appears to have been getting smaller in recent quarters — although the longer-term trends are still favourable. In this article, I will explore OpenText’s AI investments, wealth returns and financial performance, so you can gauge whether it is a fit for your portfolio.
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AI investments
The most exciting thing that’s been happening at OpenText Corp in recent years is the company making big investments in generative AI. As a content management and text analysis company, OpenText Corp can easily integrate AI into its existing offerings. Through its Aviator AI (TM) service, it offers business analytics, text analysis, content creation, and other typical things that AI data information management services tend to have. It’s a pretty comprehensive suite of AI data analysis services, but at a glance, I’m not exactly sure what differentiates OTEX’s offerings from those of other info management companies.
Returns of wealth
The other big catalyst for OTEX recently was its return of wealth to shareholders. After its most recent quarterly report, the company hiked its dividend and announced a $300 million buyback program. OTEX has an $11.7 billion market cap, so the $300 billion buyback could likely move the needle and trigger price appreciation for the company.
Recent performance
OTEX’s recent financial performance has been mixed. In the trailing 12-month period, the company shrank, with revenue down 10.5%, earnings down 3.6% and free cash flow (FCF) down 9.5%. It wasn’t the best showing, although the company’s growth rates in these metrics were comfortably positive over the last three-, five-, and 10-year periods.
OTEX scores better on profitability, with an 8.4% net margin, 18% FCF margin, and a 0.7% return on equity — no issues here.
The bottom line
At today’s price, OTEX trades at just 8.6 times earnings. By tech sector standards, it is almost dirt cheap. However, if the trend of the business shrinking continues, then the stock will someday not look to have been such a bargain at today’s price. Overall, I’m not interested in buying OTEX stock.
