Open Text (OTEX.TO)

(A Top Pick May 18/23, Down 4%)

Laggard in the market with disappointing results. Organic growth has been slow. Continues to own shares. Serial acquirer to create growth. Recent M&A starting to pay off. Earnings per share expected to rise. 150 million global users. A.I. products expected to increase. Good long term investment. 

Very strong business that has been proving itself. Recent weakness is share price has created major investment opportunity. Believes further upside in the stock. Debt levels coming down. Lots of opportunity going forward. Excellent vertical depth in business mode within sectors. 

It is in software which is a great sector. He owns a small amount but owns more of Constellation Software. Open Text has had mixed results over time but is inexpensive and the forecast is for good earnings growth over this year.

No. The asset was more hardware, whereas OTEX is trying to skew more toward SaaS, AI, large-language models. Today's theme: you have to scale in, as the market is rich, mainly because the USD is so weak. Buy in thirds here, around $52.50, and just under $50. See his Top Picks.

Has owned shares for a long time. Good for long term investors. Added shares in November. Stock performing well since fall. Expecting another acquisition. Not at low entry point. Consistent business. 

In Q1 FY2024 for OTEX, both revenue and EPS beat analysts’ estimates. Revenue came in at US$1.425B displayed year-over-year growth of 67% from $852M. Year-over-year growth in revenue was driven by Cloud revenues increasing 11% and annual recurring revenues increasing 59%. Adjusted EPS came in at $1.01, beating analysts’ estimates of $0.90. Net income was $81M compared to a net loss of ($117M) in the same period a year prior. This was a strong quarter for OTEX, with record quarterly revenue. 

OTEX recently divested AMC for US$2.275B to Rocket Software in an all-cash deal. OTEX has stated that the sale will allow the company to focus more on cloud computing and AI while cutting debt and having the ability to buy back shares in the future. The transaction is expected to close in Q4 of FY2024. Multiple banks upped price targets following this move. The focus on AI and cutting debt that the deal provides are two positives we like to see. Its valuation multiple has historically been held back because of its leverage. 
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OTEX were embracing AI before the AI explosion in Q2 this year. This was trading at great valuations in 2022, a rough year for tech. Will continue to lead in Canada in 2024.

Market likes that it spun off AMC, lowering debt. Getting pricey. Leader in content services. Supply chain analytics, AI solutions. Delivering. Stock has momentum.

Strong Canadian tech name. In TFSAs. Revenues growing, cloud exposure, starting to integrate AI. Reasonable valuation. Small company means stock price volatility. A name to consider for a 5 to 10-year time horizon.

Stock's recalibrated on slowdown in tech sector multiples. AI is going to be a game-changer, some industries will be impacted significantly, and it will fundamentally change this company. Likes it at these levels.

It is involved in the AI space and has been integrating it into their product solutions. It has done well with the tech bounce. He could see a further pullback before getting back into it.

A good company and business model, fundamentally 8/10. Be cautious on valuation, wait for a healthier pullback. Risk/reward isn't there right now. Likes it in the long run. 

He bought then sold it (though missed the peak). Wants to rebuy it. They like their latest acquisition, and they grow by buying, not organically. They migrated well from licensing to cloud services, which will raise their PE over time. Trades at a great 12x PE.

OTEX reported a net loss of US$48.7 million in its fourth quarter, down from earnings of $102.2 million last year. This was attributed to acquisition expenses. Revenue of $1.5 billion rose 66.2% year-over-year marginally beating estimates. Annual recurring revenue of $1.2 billion rose 56.4% year-over-year, and cloud revenues of $452 million were up 9.7% year-over-year. Quarterly enterprise cloud bookings rose 12.3% to $164 million. Adjusted EBITDA came in at $463 million, reflecting a margin of 31.0%. The company also announced opentext.ai, a strategic approach to advance how customers can apply artificial intelligence with OpenText software. Management guided the MCRO acquisition to return to organic growth in FY2024, earlier than expected. We think it is still some time to see valuation recovery for OTEX. We would consider anything under $48 to be a reasonable entry point. 
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He targets $62.25. He likes and follows it, but they bought Micro Focus for$6 billion, half their market cap. So if they can integrate that quickly. It would make them more competitive. Buy at $48, then at $45 in tranches. Too expensive now.