Alright I have to confess, yes, this TSX stock is down, but that’s only when you look at it over the last five years. In that case, OpenText (TSX:OTEX) has dropped, while climbing 16% in the last year. Yet there’s a reason I’ve done this analysis, and it’s not to trick you. It’s to show investors one thing: there’s more growth to come.
So today, let’s look at what makes OTEX so magnificent for investors wanting in on a tech stock that’s rebounding hard. Furthermore, let’s delve into why it’s a tech stock going through a restructuring that’s only in its beginnings.
Why buy
OTEX has actually been around for decades. Originating in Waterloo, Ontario, the firm has expanded from the humble beginnings of putting Miriam Webster online, to more lucrative revenue streams. Now, it focuses on enterprise management software, partnering with cybersecurity firms and helping to pick up contracts with government and some of the largest companies in the world.
This has proven quite successful, especially now through investments in agentic artificial intelligence (AI) software. The tech stock continues to see higher recurring revenue, with cloud revenues up 2% and annual recurring revenue rising as well. Enterprise cloud bookings also climbed 32% last quarter year over year, supporting more predictable cash flow.
Operating cash flow was also strong and free cash flow substantial, with management returning $683 million in buybacks and dividends for full-year 2025. What’s more, the valuation still looks reasonable trading at 9 times earnings. Therefore, the market has still not caught up to its big premium, especially with AI and security products as well as major partnerships driving higher bookings as well.
What to watch
Now of course no stock is absolutely perfect. The shift towards agentic AI has created debt, debt that hasn’t been completely covered by its sale of Micro Focus. Today, total debt sits at $6.7 billion, with a high debt-to-equity (D/E) ratio at 169%. So persistent revenue weakness could strain the balance sheet and limit flexibility.
Total revenue year over year in fact was down 10%, with ARR also down. So management’s current guidance reflects modest growth. Furthermore, earnings per share (EPS) can show year over year swings from one offs and legacy items. And with a 2.9% dividend yield and 64% payout ratio, it’s stable but not exactly an income stock.
What investors might want to consider then is buying OTEX gradually through dollar-cost averaging, rather than one large purchase. What’s more, size your position to match your risk tolerance. From there, continue to monitor quarters and look for cloud ARR (annual recurring revenue) growth, FCF (free cash flow) growth for dividend and buyback coverage, and lower debt.
Bottom line
Overall, OTEX looks like a tech stock that’s been through it all, and continues to find new ways of expanding through recurring revenue streams. It’s therefore a solid long-term hold for investors wanting in on Canadian software companies, all while receiving dividend income that looks as though it can last! Nonetheless, always make sure to keep an eye on your investments, and discuss any purchase with your financial advisor.
