Better Buy: CGI Stock or OpenText?

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Better Buy: CGI Stock or OpenText?

TSX tech stocks such as CGI and OpenText have delivered stellar gains to investors in the last decade.

Aditya Raghunath ❯

Aditya Raghunath joined the Motley Fool Canada team in 2019 and has close to seven years of experience in covering publicly-listed companies. With a post-graduate degree in finance, Aditya aims to educate and engage Canadians by writing extensively about growth, dividend, and value stocks. If you are considering investing in the stock market, he recommends reading The Intelligent Investor by Benjamin Graham before taking the plunge.

Published February 13, 2024 9:30 am EST

| More on: GIB.AOTEXXIU

Canadian tech stocks have created massive wealth for long-term shareholders. For instance, in the last decade, iShares S&P/TSX Capped Info Tech ETF (TSX:XIU) has returned over 500% to shareholders. Comparatively, indices such as the Nasdaq Composite and the S&P 500 have returned 286% and 178%, respectively, in this period.

Two quality tech stocks that are part of Canada’s tech index are CGI (TSX:GIB.A) and OpenText (TSX:OTEX). Let’s see which TSX tech stock is a better buy right now.

The bull case for CGI stock

Valued at $35 billion by market cap, CGI stock has surged close to 350% since February 2014. The Canadian company provides information technology and business process services that include business and strategic IT consulting, systems integration, and software solutions.

In the fiscal first quarter (Q1) of 2024 (ended in September), CGI reported revenue of $3.6 billion, an increase of 4.4% year over year. The growth was driven by strong demand from the government vertical, as sales were up 7.5% year over year.

In fact, government continues to be CGI’s largest vertical market, accounting for 36% of total sales in the quarter, up from 35% in the year-ago period. CGI delivers recurring services and business solutions to support government clients across cybersecurity, logistics, and financial management.

The company’s global backlog remained strong, touching $26.6 billion or 1.8 times revenue. Analysts expect CGI to grow its sales from $14.3 billion in fiscal 2023 to $15.5 billion in fiscal 2024. An asset-light model allowed CGI to end Q1 with $527 million in earnings before taxes.

Despite rising costs and an inflationary environment, CGI is forecast to improve adjusted earnings per share from $7.07 in fiscal 2023 to $8.39 in 2025. Priced at 18.3 times forward earnings, CGI stock is quite cheap and should outpace the broader markets in 2024 and beyond.

The bull case for OpenText stock

Valued at $15.9 billion by market cap, OpenText stock provides information management software and solutions. Its sales in fiscal Q2 of 2024 (ended in June) grew by 71% year over year to US$1.3 billion. The top-line growth was driven by OpenText’s acquisition of Microfocus.

In the December quarter, Microfocus contributed US$601 million in sales and should end the fiscal year with renewal rates in the high 80s.

OpenText has now reported 12th consecutive quarters of annual recurring revenue growth. Moreover, enterprise cloud bookings stood at a record $236 million, up 63% year over year.

OpenText’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at US$566 million, indicating a margin of 37%. Comparatively, free cash flow almost doubled to US$305 million in fiscal Q2.

OpenText reported 48 cloud wins with over US$1 million in new contract value in Q2. Analysts forecast OpenText to increase sales by 32.2% to US$5.93 billion with adjusted earnings per share of US$4.61.

Priced at nine times forward earnings, OpenText is really cheap and trades at a discount of 24% to consensus price target estimates.

The Foolish takeaway

Investors can consider diversifying their portfolio and purchasing shares of both Canadian tech stocks. CGI and OpenText are well positioned to derive outsized gains for shareholders due to their reasonable valuation, expanding profit margins, and widening customer base.