1 Growth Stock With Legit Potential to Outperform the Market

In a world where data is king, this company is well-poised to help enterprises manage the digital transformation.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published September 30, 2024 8:00 pm EDT

| More on: OTEX

When it comes to growth stocks, investors may once more be eyeing up this one. OpenText (TSX:OTEX) is a tech powerhouse that has been around for a while, but don’t let its age fool you. This company has some serious potential to outperform the market. One of the key reasons is its focus on digital transformation, a trend that has been accelerating post-pandemic as more companies adopt cloud computing and automation.

OpenText specializes in enterprise information management, helping organizations manage and secure vast amounts of data. In a world where data is king, OpenText’s solutions are critical. But more could be on the way.

Data center woman holding laptop — Source: Getty Images

Onto earnings

Now, let’s talk numbers. OpenText has been showing signs of a comeback despite a somewhat turbulent year. Its recent earnings, although not stellar, still reflect solid performance. For its fiscal year, OpenText generated $5.8 billion in revenue, which is impressive but slightly down year-over-year. The company’s quarterly revenue growth dipped by 8.6%. Yet it’s worth noting that OpenText is navigating a challenging macroeconomic environment. The dip seems more like a bump in the road rather than a long-term issue.

What’s exciting is OpenText’s forward price/earnings (P/E) ratio of 8.9, which suggests that the stock might be undervalued compared to its earnings potential. The market is pricing it more conservatively than its trailing P/E of 18.7, indicating that investors could be underestimating its future growth. This leaves room for potential upside, especially if the company continues to execute on its cloud-first strategy.

OpenText’s balance sheet is also pretty robust. It holds $1.3 billion in cash, providing a buffer against economic uncertainties. Yes, its debt load is high at $6.7 billion, but the company has consistently generated strong operating cash flows, most recently $967.7 million over the last 12 months. That means it can service its debt while still having room to invest in growth or return capital to shareholders.

Looking valuable

Speaking of shareholders, OpenText’s dividend yield is an attractive 3.3%, and its payout ratio is relatively moderate at 58.5%. This makes it a compelling option for dividend-focused investors. In fact, the company has a five-year average dividend yield of 2.2%, so it’s clear they value returning capital to shareholders. With its strong cash flow, OpenText is well-positioned to continue rewarding investors even as it reinvests in growth.

From a technical standpoint, OpenText is hovering around a price of $44 at writing. While it’s still off its 52-week high of $60, it’s showing resilience after touching a low of $37.92. This upward trend could indicate a broader market belief in the company’s long-term prospects – thus signalling that now might be a good time for investors to get in before a larger rally.

Bottom line

Altogether, OpenText has the right mix of solid fundamentals, an attractive valuation, and growth potential to make a comeback. While there are some short-term challenges, its focus on digital transformation and cloud-based services positions it well for future growth. Investors looking for a tech play with a strong dividend and market-beating potential should keep an eye on this one.