OpenText’s (TSX, NASDAQ:OTEX) growth strategy has both an organic and a growth-by-acquisition side to it, which ultimately gives the stock an attractive risk-to-reward profile, says Richard Tse of National Bank Financial Markets. On Tuesday, the analyst reiterated his “Outperform” rating and $50.00 target price for OpenText (all figures in US dollars).
This week, OpenText is holding its annual user conference (Enterprise World 2018) in Toronto, with the company highlighting the evolving environment in Enterprise Information Management (EIM).
“All industries are facing a series of challenging macro-trends as they transform into intelligent and connected enterprises,” said Mark J. Barrenechea, Vice-chair, CEO and CTO. “The new demands of a millennial workforce, the relentless threat of cyberattack, changing modes of work, and newly challenging information privacy and regulatory environments are changing the ways that businesses operate. At the same time, digital technology is changing the nature of commerce, work, society, privacy, and security. At OpenText we believe that data and information can be harnessed to ensure these changes make a profound and positive impact on all of our lives.”
Tse says he came away from the conference and concurrent investor day feeling that OpenText’s long-term strategy and product road map reveal a company that’s fortifying its avenues for growth, from acquisitions to organic.
“We continue to see a growing base of recurring revenue through acquisitions, expanding operating leverage, and optionality from what we believe to be developing organic growth that’s not priced into the stock,” says Tse in a note to clients. “When paired with a flexible balance sheet and continued appetite for acquisitions, it’s no surprise why we continue to rate OpenText an Outperform.”
As an example, Tse points to the company’s next generation hybrid cloud platform announced this week, the OT2 Platform, which the analyst says will lower the integration risk of future acquisitions.
“Bottom line, everything we heard yesterday reinforced our view that this remains a solid growth story. If anything, what we heard reinforced multiple avenues of growth and when paired with the relative valuation gap to the software group, we like the potential upside,” says the analyst.
Tse thinks OTEX will generate EBITDA of $997 million on revenue of $2.81 billion in 2018 and EBITDA of $1.11 billion on a topline of $3.07 billion in 2019. His $50.00 target represents a projected 12-month return (including dividend) of 36 per cent at the time of publication.