Investors have been fairly nervous about today’s market downturn. With tariffs and trade wars, the future looks uncertain, especially in an economic sense. Yet there are some companies that look downright undervalued. And today, we’re going to consider why OpenText (TSX:OTEX) looks like one of them.
OpenText stock
OpenText, based in Waterloo, Ontario, stands out as a significant figure in the realm of enterprise information management. Founded in 1991, the tech stock has grown to become one of Canada’s largest software firms, offering solutions that assist organizations in managing and securing their data.
Over the past year, OpenText’s stock experienced a notable decline, trading approximately 33% below its all-time high. As of writing, the tech stock closed at $37.15, down from its 52-week high of $54.86. This downturn has raised questions among investors about the company’s potential for a comeback.
In its second quarter of fiscal year 2025, OpenText reported total revenues of US$1.3 billion, marking a 13.1% decrease compared to the same period the previous year. When adjusted for the divestiture of the Application Modernization and Connectivity (AMC) business, the decline was a more modest 4.9%. Despite the dip in revenue, the company achieved a net income margin of 17% and an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin of 37.6%, thus reflecting robust operational efficiency.
Growth and stability
The tech stock’s cloud services segment showed resilience, with revenues growing by 2.7% year-over-year to US$462 million. OpenText also secured US$250 million in new cloud contract value during the quarter, indicating strong customer demand for its cloud offerings.
Financially, OpenText continues to demonstrate stability. The tech stock generated operating cash flow of US$348 million and free cash flow of US$307 million during the quarter. Plus, it returned US$134 million to shareholders through dividends and share repurchases, underscoring its commitment to delivering value to investors.
In a move to further enhance shareholder value, OpenText announced an increase in its share repurchase program to US$450 million and established an automatic share purchase plan.This initiative reflects the company’s confidence in its long-term prospects and its dedication to returning capital to shareholders.
Looking ahead
The company’s leadership remains optimistic about the future. CEO and CTO Mark J. Barrenechea emphasized OpenText’s commitment to helping customers adapt to the evolving multi-cloud landscape. He highlighted the upcoming launch of Titanium X set for the fourth quarter, which aims to integrate cloud, security, and artificial intelligence capabilities.
Despite these positive developments, OpenText has faced challenges in its Application Development and Management (ADM) and IT Operations Management (ITOM) businesses. These segments have experienced revenue declines, prompting the tech stock to revise its fiscal year 2025 revenue target downward by US$130 million to a range of US$5.175 billion to US$5.27 billion. The adjustment accounts for factors such as foreign exchange impacts and challenges in specific business segments.
To address these challenges, OpenText is focusing on strategic investments and operational enhancements. The tech stock aims to return to organic growth by the fourth quarter and build on its competitive advantages. The company’s commitment to innovation is evident in its recent initiatives. OpenText launched Webroot Total Protection, a next-generation cybersecurity solution with artificial intelligence (AI)-powered threat detection and response capabilities. This product aims to provide comprehensive protection against evolving cyber threats, reinforcing OpenText’s position in the cybersecurity market.
Foolish takeaway
Investors considering OpenText should weigh these factors carefully. While the tech stock has experienced a significant decline, the company’s strong financial performance, strategic initiatives, and commitment to innovation position it well for a potential rebound. However, challenges in specific business segments and the broader economic environment should be taken into account.
The tech stock has demonstrated resilience amid market fluctuations. Its focus on cloud services, strategic partnerships, and innovation in cybersecurity reflects a forward-looking approach. As OpenText stock navigates challenges and capitalizes on opportunities, investors will be keenly observing its performance in the coming quarters.