OpenText is my Top Pick, this portfolio manager says

It’s no secret that tech stocks have been flattened in 2022, but perhaps few have had as perplexing of a downfall as Canadian information management company OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials TSX:OTEX), which is off by almost 50 per cent over the past year despite solid performance from the company. And while some of the pullback may be justified given the height of tech valuations last year, portfolio manager Andrew Pyle thinks the teardown of OpenText has gone too far.

An investment advisor at CIBC Wood Gundy, Pyle says investors will want to buy OTEX now that the stock is down to multi-year lows. 

“This is more of a speculative add for the portfolio,” said Pyle, who nominated OpenText as one of his three top picks in a segment on BNN Bloomberg on Tuesday. “It does pay a dividend, so I don’t want to say it’s not a dividend paying stock, but at just north of three per cent it’s not obviously in our camp of high-dividend producers.”

“But we do think the stock has been disproportionately beaten up over the course of this year like a lot of other tech names,” he said.

OpenText was floating along with a significant but reasonable pullback as of late August this year, sporting a year-to-date return of just under 20 per cent. Then the bottom really fell out after OpenText announced an agreement to acquire UK-based enterprise software company Micro Focus, with the market taking a distinct dislike to the idea and dropping the stock a further 15 per cent in short order.

The reason? Micro Focus has been on a downward revenue trend for a while now, essentially making the $6 billion price tag for the acquisition a huge question mark as to whether OpenText will be able to turn the ship around in short enough order. That type of tidying up is one of OpenText’s trademarks, however, as the company has a long history of buying companies, integrating and allowing the new business to benefit from the OpenText ecosystem. 

“Micro Focus brings meaningful revenue and operating scale to OpenText, with a combined total addressable market (TAM) of $170 billion,” said OTEX CEO and CTO Mark J. Barrenechea in a press release on August 25 announcing the proposed acquisition.  

“With this scale, we believe we have significant growth opportunities and ability to create upper quartile adjusted EBITDA and free cash flows. We expect Micro Focus to be immediately accretive to our adjusted EBITDA. Micro Focus will benefit from the OpenText Business System to create stronger operations and significant cash flows, and Micro Focus customers will benefit from the OpenText Private and Public Clouds,” Barrenechea said.

So far, though, the investment community hasn’t been hip to OpenText’s plan, as the stock has continued to drop over the past month and a half, taking OTEX to levels not seen in over half a decade.

That makes for a buying opportunity, according to Pyle.

“OpenText recently announced coordinated activities with Google, which I think will be positive for the stock going forward,” Pyle said. “And this is really a value play for us, getting into a stock that has decent fundamentals but just has had its valuations pummelled. And we think at the levels that we’re looking at right now at about $35.50 per share it represents a good entry point.”

“The P/E ratio on this stock right now is about 8.3x, so the valuation is, in our opinion, attractive. But again, we emphasize the fact that this is more of a speculative add to the portfolio as opposed to a large-cap stock with high dividend producing capabilities,” he said.

Pyle said with the pullback on tech, there are a number of opportunities available, but OpenText is one stock investors will want to add to their portfolio.

“Largely our tech exposure is on the US side where we have the larger cap names to choose from and that’s still going to be the case,” he said. “[OTEX] is not going to represent a large part of the portfolio but it’s really one of the companies that interests us the most on the Canadian side. And again, it’s really a valuation play at this point.”

Last week, OpenText had its World 2022 conference in Las Vegas, held in person for the first time in three years, and showcasing a new integration feature on its Core Content public cloud service platform. The collaboration with Google Workspace will allow users to sync content in managing and editing content via business applications like SAP and Salesforce. 

“Remote and hybrid work is here to stay, and the ability to manage and edit content in the context of digital processes is critical to the success of modern work,” said Muhi Majzoub, Executive Vice President and Chief Product Officer at OpenText, in an October 15 press release. “The integration between OpenText Core Content and Google Workspace will allow organizations to access and edit content while working in SAP S/4HANA Public Cloud, SAP SuccessFactors, and Salesforce, all while seamlessly automating the governance of this critical information.”