OTEX is an undervalued stock, National Bank says

The stock has been a strong performer in 2023, but National Bank Financial analyst Richard Tse says there is still money to be made on OpenText (OpenText Stock Quote, Chart, News, Analysts, Financials TSX:OTEX).

After a head-to-head meeting, Tse says he came away with confidence in his investment thesis.

“We had the opportunity to meet investors with OpenText Management (CEO and CTO Mark Barrenechea and EVP and CFO Madhu Ranganathan) today,” Tse wrote. “Over the course of our meetings, we learned (1) the Company continues to execute well on its integration of Micro Focus; (2) OpenText is moving back to an emphasis on organic growth; and (3) its organic emphasis appears to be underscored by its focused efforts in AI with opentext.ai, a strategic approach to advance how customers solve complex problems by applying Artificial Intelligence (AI) and Large Language Models (LLM) with their OpenText Information Management software. In the short term, the Company appears to be tracking to its outlook for the coming calendar Q3 (fiscal Q1). Further out, the Company is expecting to see an acceleration in organic cloud growth over the next 12-18 months. All in, what we heard remains consistent with our investment thesis, and from a valuation standpoint, 8.4x F24 EV/EBITDA looks compelling against the Company’s relative growth potential with de-levering being a further benefit to the equity holder.”

In a research update to clients September 6, Tse maintained his “Outperform” rating and one year price target of (US) $60.00 on OpenText, implying a return of 52.7 per cent at the time of publication.

Tse thinks OTEX will post Adjusted EBITDA of $2.19-billion on revenue of $5.91-billion in fiscal 2024. He expects the company will post EBITDA of $2.32-billion on a topline of $6.06-billion in fiscal 2025.