To look at the share price of OpenText (TSX:OTEX), investors might think it’s been having a rough year. Shares are down about 22% from 52-week highs as of writing, though up slightly in the last year. Even so, this could mean there is an opportunity for long-term investors.
In fact, OpenText stock has had a solid performance throughout 2023, thus making it a compelling stock to watch as we head into 2025. So, let’s look at whether it’s a buy, sell, or hold coming into next year.
Into earnings
First, let’s look at the earnings for OpenText stock. Its recent earnings report showed annual revenues of $5.8 billion, marking an impressive growth rate of 28%. The cloud segment, which remains a key part of OpenText’s strategy, saw growth of nearly 10%, thus signalling strong demand for its cloud services, especially after the integration of Micro Focus, one of its recent acquisitions. This deal has boosted OpenText’s annual recurring revenues and added significantly to its customer support services, a segment that grew over 114% year-over-year
Despite this positive momentum, the stock hasn’t been without challenges. For the fiscal year ending June 2024, OpenText’s GAAP-based net income decreased significantly, dropping 62% from the previous year. OpenText stock cited acquisition-related costs as a reason for this decline, highlighting some of the financial strain that comes with large-scale integrations like Micro Focus. Nonetheless, adjusted earnings per share (EPS) of $0.91 in the most recent quarter showed a 13.8% improvement, demonstrating resilience
Looking forward to November 2024, analysts expect another strong showing. Investors will be watching the company’s earnings on November 4, where OpenText is expected to continue capitalizing on its cloud services, artificial intelligence (AI) initiatives, and partnerships with major tech firms like Google Cloud and Microsoft. Analysts predict EPS to grow by around 13%, signalling confidence in OpenText’s long-term potential as the company deepens its focus on AI-driven information management solutions
Where does it fall?
From an analyst perspective, many experts hold a “buy” rating on OpenText. Some even see potential for the stock to outperform given its low forward price-to-earnings ratio of 9.4. This compares favourably to peers in the information management sector. The stock is also yielding a dividend of 3.1%, making it attractive for income investors
However, there are some risks to keep in mind. The company’s debt-to-equity ratio stands at a high 159%. And while its cash flow remains solid, its leverage might be a concern if future growth doesn’t materialize as expected. Plus, its revenue growth has slowed in the latest quarters, with some declines in total revenue compared to earlier in the fiscal year
Given this, OpenText stock presents itself as a hold for cautious investors. The stock has room for growth but is not without risks. If you’re already holding OpenText, its long-term outlook, bolstered by recurring revenues and AI investments, suggests continued stability. For new investors, waiting until after the November earnings report could provide more clarity on whether the company can sustain its growth trajectory.
Bottom line
OpenText stock is a well-positioned company in the growing information management space, with AI and cloud services acting as growth drivers. But with some challenges around profitability and high debt levels, it might be wise to adopt a cautious approach – either holding onto existing shares or waiting for more consistent earnings before making any significant buy decisions.
