Is OpenText a Must-Buy Stock?

As more companies transfer operations to the cloud and use it for day-to-day computing needs as well as securely storing critical data, an information management software company like OpenText (NASDAQ: OTEX) becomes an increasingly valuable resource. The Canadian company offers its customers online products and services aimed at improving operations, including digital process automation and machine-assisted decision making.

One way OpenText has been able to expand its offerings to clients is by acquiring companies that fill a needed niche. Here’s a bit more about OpenText’s latest efforts to expand.

Cloud users can all benefit from a little Carbonite

OpenText last month revealed its ninth acquisition when it announced it was buying data protection specialist Carbonite (NASDAQ: CARB) for $1.42 billion, or $23 a share. OpenText paid a hefty 78% premium from where Carbonite’s shares were in early September when rumors first emerged about a possible deal. However, it’s clear OpenText thinks the premium price is worth it, given the value that Carbonite can offer.

Image Source: Getty Images.

Carbonite has been growing its cybersecurity presence. In early 2019, it acquired Webroot, a company that provides endpoint protection and helps guard data from phishing attempts, malware, and ransomware. Keeping data safe is more important than ever as breaches become more and more prevalent. Carbonite will play an important role in OpenText’s future by giving its customers better, more comprehensive solutions that balance information, automation, and security.

The biggest benefit for OpenText is that Carbonite has been focused mainly on the U.S. market and has plenty of opportunities for international expansion. OpenText has operations in 40 countries and a much wider customer base. That’s going to give OpenText a chance to generate more sales from existing customers as well as making it more appealing to potential new customers. Expect the company to eventually show a boost in its retention rates for existing customers.

OpenText has done well integrating prior acquisitions

One of the big challenges with integrating new companies is weeding out inefficiency and duplication of efforts. What’s impressive about OpenText is that the company has consistently posted profits and sales growth while managing past integrations. Overall yearly revenue has grown each year for the past four fiscal years and now stands at $2.9 billion, up 57% from 2016 fiscal year totals. Operating income has grown to more than $602 million over that time as well, an improvement of 49%.

The profits being generated by the company are fueling a strong free-cash-flow position, with $812 million on the balance sheet this past fiscal year. Having ample cash on hand is important for a tech company that’s looking to grow. It lessens the need to issue shares, which prevents dilution of existing shares. It also makes it easier for OpenText to make the next acquisition it needs to grow the company.

The stock offers investors good value over the long term

Year-to-date, OpenText shares have climbed by more than 30% — and that’s after the stock took a big hit in August when the company’s fourth-quarter earnings underwhelmed investors with less growth than expected. The stock has recovered since then and its future could be even brighter, with the Carbonite deal opening up even more opportunities.

The one negative about OpenText at the moment is that the tech stock is a bit expensive, trading near its record high and at a multiple of more than 35 times its earnings and three times its book value. Given the volatility that the stock has shown this past year, investors may want to put OpenText’s stock on their watch list and wait for a dip in price before buying. But over the long term, the stock should prove to be a very good investment.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Open Text. The Motley Fool has a disclosure policy.

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