Why should you be buying OpenText (OpenText Stock Quote, Chart, News TSX:OTEX) at this time? History speaks for itself, says Brian Madden of Goodreid Investment Counsel.
“The knock against OpenText by technology analysts and people in the brokerage firms has always been, ‘Well, it’s slow, it’s boring and doesn’t have a lot of organic growth.’ But the way they integrate and source and and synergize acquisitions has been nothing short of phenomenal,” says Madden, senior vice president at Goodreid, who spoke on BNN Bloomberg on Tuesday.
“For that reason, the stock is at a 20-year compound annual growth rate of 14 per cent, which is triple the overall TSX Composite and head and shoulders above the TSX tech sector which has actually a negative return over that time frame,” Madden said.
Waterloo-based OTEX is an enterprise information management company with software applications to manage data for clients in the private and public spheres. The company has over 12,000 employees and has Tier 1 clients on board. This past quarter, OpenText announced customer wins including General Motors and Nestle S.A. along with a cloud agreement with Amazon Web Services whereby OTEX’s information management solutions will be available for clients as fully-managed services on AWS.
Announced in late April, the AWS partnership will help accelerate the transition of OTEX’s customers to the cloud, according to the company.
“The combination of OpenText applications and expert managed services, together with the scalability and reach of AWS bring secure, resilient, and compliant solutions to an expanding set of new and shared customers.,” said Mark J. Barrenechea, OpenText CEO and CTO, in a press release.
Madden says even though OTEX doesn’t have the glamour of other Canadian tech names like Shopify or Lightspeed POS, it’s still a classic buy-and-forget-about-it stock.
“We do like OpenText and we’ve owned it for quite some time,” Madden said. “It’s an acquisitive company. They’ve completed about $6.3 billion of acquisitions since 2014, and three quarters of their revenues are recurring, which means there’s pretty good visibility into sales from one quarter to the next.”
“Admittedly, the licensed sales visibility’s gotten a little bit murky amidst the recession [but] that’s a smaller part of their overall business,” Madden said. “What we’ve noticed in their [latest] quarterly results is that digitization and connectivity and the work from home phenomenon has only further cemented the importance of their types of products in the minds of enterprises, large and small.”
OpenText delivered its fiscal third quarter 2020 results on April 30, where for the three months ended March 30 the company reported revenues of $814.7 million, up 13 per cent year-over-year, and adjusted EBITDA of $259.5 million, a hair lower than the $261.8 million a year earlier. Both the top and bottom lines came out ahead of consensus.
“It’s a company that’s not necessarily a global powerhouse —it’s run out of Waterloo— but they actually have 100-million-plus users spread across 10,000 companies in over 100 countries, and 95% of the revenues come from outside of Canada, mostly from Europe and the United States,” Madden said.
“We think this is a great grower,” Madden said. “It’s still pretty good value and trades at about 14x earnings and is growing earnings at about a 15 per cent compound growth rate, so a good one that you can buy and hold and sleep well at night for the foreseeable future, and we are buying it today.”