Open Text faces uphill battle, National Bank says

A shift towards more organic growth and fewer acquisitions means investors should steer away from Open Text (Open Text Stock Quote, Chart, News, Analysts, Financials NASDAQ:OTEX), says National Bank Financial analyst Richard Tse.

On October 31, OTEX reported its Q1, 2025 results. The company posted Adjusted EBITDA of 444.0-million on revenue of $1.27-billion, a topline that was down 11% year-over-year.

“The strength of the OpenText operating model has resulted in strong margin performance this quarter,” said OpenText President & CFO Madhu Ranganathan. “We continue to focus on driving operational efficiencies across the organization and we have a defined path in place for future margin and cash flow growth. Based on this foundation of operational excellence we continue to invest in our growth and have the capital flexibility to deliver on our Fiscal 2025 Targets.”

Tse offered his thoughts on the quarter and where OTEX is right now.

​

“OpenText reported essentially in-line FQ1’25 (CQ3) revenue relative to expectations with a meaningful EPS beat,” he wrote. “That said, we think the notable sell-off in the stock comes from an outlook that has the bulk of growth coming in the back half of F25 (June FYE); this, when the current growth run rate (FQ1A and FQ2E) is notably below those full-year targets (from seasonality). All that is consistent with our investment thesis to hold off on this name (Sector Perform) given the challenges from OpenText’s shift towards an organic growth narrative. In our view, that will continue to be challenging given the Company is fundamentally built to grow via acquisitions and not organic measures.

In an update to clients October 31, Tse maintained his “Sector Perform” rating and price target of (US) $38.00 on OTEX.

The analyst thinks the company will post Adjusted EBITDA of $1.81-billion on revenue of $5.3-billion in fiscal 2025. He expects those numbers will improve to Adjusted EBITDA of $1.95-billion on revenue of $5.49-billion in fiscal 2025.

“Bottom line, OpenText’s shift in strategy to an organic growth narrative remains challenging given a broad product portfolio where we’ve seen limited success in the past when it’s attempted to grow organically,” Tse concluded. “It’s our view that once the leverage constraint lifts, OpenText will pivot back to an acquisition growth story. We’re maintaining our Sector Perform rating and target price of US$38 which implies 8.6x EV/EBITDA (unchanged) on F25E.”