OpenText is one of our favourite legacy tech stocks, National Bank says

Enterprise software company OpenText (OpenText Stock Quote, Chart, News TSX:OTEX) gets high praise from National Bank Financial analyst Richard Tse but the stock and company are likely to do better over the long-run than over the COVID-19 era.

In an update to clients on April 8, Tse kept his “Outperform” rating for OTEX but dropped his target from $55.00 to $45.00, representing at press time a projected 12-month total return of 25 per cent.

Waterloo, Ontario-headquartered OpenText held its Enterprise World Europe conference on Wednesday in a virtual format, drawing over 2,500 participants as the company announced the release of OpenText’s CE 20.2, the cloud-native version of OpenText’s suite of information management applications, and its new Trading Grid cloud integration services platform.

“COVID-19 changes everything, and industries are experiencing massive disruption in their approach to materials, manufacturing and supply chain strategy,” said CEO & CTO Mark J. Barrenechea in a press release. “Our new OpenText Business Network 20.2 responds to these radical shifts. Our new unified platform solves for this complexity by vertically integrating all aspects of the modern supply chain, including EDI, ERP and new Cloud services and APIs.”

Tse attended the online event and while unable to speak to customers and partners in person the analyst came away feeling good about OTEX’s long-term position with CE 20.2.

“We see the release as firmly pivoting OpenText towards an increasingly recurring revenue base while making it easier to drive organic growth given an integrated suite of applications and services in the cloud,” Tse wrote.

“Of course, while the above is positive to supporting our investment thesis (longer term), the hard reality is we won’t likely see the full benefit of today’s product announcements for some time given the current global backdrop,” Tse said.

Tse said even though the current climate has upped the risk profile for many companies including OTEX, the company is on solid footing, pointing to the company’s strong balance sheet bolstered by 80 per cent recurring revenue and a cash flow profile of $594 million in free cash flow in fiscal 2020.

More specifically, during the COVID-19 pandemic Tse pointed out that while OTEX’s solutions don’t necessarily target the current work-from-home boom, its recent major purchase in Carbonite is helpful in that it came with Carbonite’s BrightCloud Threat Intelligence. useful in the current high-online traffic environment.

Tse also pointed to OpenText’s portfolio of telecommuting support solutions such as OpenText Exceed

TurboX, OpenText Carbonite O365 MS Teams Backup and Core share and Signature, all remote work applications.

“Bottom line, our view on OTEX is unchanged. Investors following our research will know it remains one of our favourite ‘legacy’ names. We continue to see relative value with some compelling defensive attributes at this point. We see a growing base of recurring revenue through acquisitions, expanding operating leverage and optionality from organic growth,” Tse added.

For 2020, Tse thinks OTEX will generate revenue and EBITDA of $2.96 billion and $1.05 billion, respectively, and 2021 revenue and EBITDA of $3.17 billion and $1.17, respectively. (All figures in US dollars.)