We’re buying OpenText, this portfolio manager says

It’s been a long while since OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials TSX:OTEX) was last trading at its current levels. At $38 and change, you’d have to go back to 2016 to dig that deep. Once as blue chip as they come in the Canadian tech space, OTEX has been hammered over the past year, enough to have investors wondering when the market hate-on for the stock will end.

But the plus side is we don’t need to time the bottom on this one, as there’s clearly a better future ahead for the stock and the company, which has decades of proven success behind it. And for portfolio manager Andrew Pyle of CIBC Wood Gundy, there’s too much promise to OpenText to pass it up.

“This is really a valuation play for us. The stock has lost close to 50 per cent. At these levels, I think [OpenText] probably reflects any negativity that is built into this market over the course of 2022,” said Pyle, who spoke on BNN Bloomberg on Tuesday, where he named OpenText as one of his top picks for the 12 months ahead.

“I think right now you see this company continue to expand its cloud services platform, the percentage of its revenue base in cloud, and I think that really sets it up well going into 2023,” he said. 

Like the rest of the tech space, OpenText started dropping last fall and while the stock’s losses were fairly steep as of this past summer, things looked manageable. That was until the company announced a major acquisition in UK-based Micro Focus for $6 billion. Investors balked at the deal, with one potential worry being a stagnant revenue trajectory at the firm. 

That dropped the stock to its current sub-$40 territory, compared to highs in the mid-$60s last year. 

Pyle, who has a target price on OTEX of about $50 over the next 12 to 18 months, thinks OpenText’s growth-by-acquisition model might be challenging over the next stretch, as it’s currently a more difficult market in which to raise capital for big purchases. At the same time, valuations have come down markedly, making them potentially more attractive to M&A.

“A lot of the opportunities that OpenText might be looking at have cheapened up in the last little while. So, it’s weighing the cost of capital to the cost of acquisition,” he said. “[The acquisition market] is not dead. I think you’re just going to see a much more selective and perhaps a slower pace of acquisition, at least in the early parts going into 2023.”