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Company Break Down

Open Text – A Discounted Stock with Potential

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Open Text is a software firm based out of Waterloo Ontario. They specialize in Enterprise Information Management (EIM) solutions with heavy involvement in cloud computing. They focus on business to business sales and solutions.

Open Text focuses on business to business sales and solutions. Their software is used for a variety of corporate purposes such as managing corporate intranets, documents and workflows, as well as group work solutions. Open Text most recent Q4 report, showed a strong performance, and a beat on earnings. Top-line revenue growth was reported at 13.7%, net income growth at 33.8% and cash flow growth at 100.5%. With a balance sheet that can support further growth, through capEx as well as through acquisition, the company is in prime shape to continue their growth trajectory.

Growth

OpenText estimates show attainable, yet solid growth for the business. Revenue is expected to grow to 3 billion by 2020. Net income is expected to almost triple from 279.7 million current LTM to 787 million. Free cash flows are also expected to grow to 882.5 million from 604.6 million current LTM. with a long-term growth rate at < 10%, trading at 13x earnings currently, Open Text valuation offers investors a mix of great value with decent growth.

OpenText’s growth is supported by significant recurring revenue. Their subscription and customer support fees account for 73% of their revenues, or $2.06 billion of their total 2.82 billion. This provides investors with predictable revenues for the company to continue to increase their dividend, as well as provides security for OpenText and investors in the event that the macro-environment suffers a downturn. This type of event appears increasingly more likely based on recent market breadth and sentiments.

Selloff, an Opportunity?

OpenText and the market as a whole has recently felt the pains of a significant sell off. Since achieving an all time high of $51.99 on September 4th, the company’s stock has fallen 15%, in the range of $45.00, and near intermediate support at $43, and at $41, meaning now could be a good time to start a position. This drop appears not to be in relation to any of Open Text’s activities. Rather, the drop appears attributable to the current general market sell off, a sell off which has hit tech stocks particularly hard. 

Valuation?

OpenText current stock position provides a fantastic buying opportunity. Already trading at a 15% discount to its 52 week high, OpenText has started to recover its losses. I believe that Open Text will recover its losses given the market remains bullish, and appreciate to a value of $60/share. This target price is based on the fact that OTEX should receive a revaluation around a market multiple of 15x, a growing 1.7% divided, coupled with earnings growth of around 12%. This places the return potential for Open Text at 33%, a very healthy return,  even considering the high returns experience in tech earlier this year. With OpenText’s strong recurring revenue, huge cash flows relative to earnings, and steady revenue growth will provide investors with plenty of value.