Legacy Decline And Acquisition Risks Will Shadow Future Value

Key Takeaways

• Persistent weakness in legacy products, modest cloud growth, and intense price competition threaten long-term revenue and margin expansion.
  
• Heavy dependence on acquisitions and pressures from regulatory, technological, and hyperscaler shifts heighten operational and strategic risks.
  
• Strong cloud and AI growth, high renewal rates, strategic partnerships, cost optimizations, and enhanced capital returns position the company for durable revenue and increased shareholder value.

Catalysts

Engages in the provision of information management products and services.

• The accelerating customer migration to cloud and SaaS solutions continues to undermine demand for Open Text's legacy on-premises products. Cloud revenue grew only 2% last year, and although guided to 3% to 4% organic growth, this modest pace reflects persistent weakness in the legacy business, pressuring total revenue and dampening long-term growth potential.
  
• The company faces rising compliance costs and operational risk stemming from increasingly strict cybersecurity and data privacy regulations worldwide. While these environments can spur some demand, they also significantly raise operational complexity and threaten net margin expansion, especially with growing legal exposure across geographies.
  
• Ongoing price competition from open-source and low-cost alternatives in information management intensifies, risking further margin compression as Open Text must compete aggressively on price to retain and attract customers. The modest cloud growth, flat business network revenues, and last year's negative 4% growth in cyber cloud highlight pressure on both revenue and profitability.
  
• Heavy reliance on large-scale acquisitions for growth exposes the company to integration risks, increasing debt loads, and potential impairments. Although M&A is set to resume, previous deals like Micro Focus and Carbonite require significant modernization, and further large acquisitions may dilute earnings and reduce stability in free cash flow.
  
• Dominance of hyperscalers like AWS, Microsoft, and Google threatens to erode Open Text's mid-market positioning as enterprise software consolidates around these platforms. Rapid AI and automation innovation could make traditional enterprise content management offerings obsolete or commoditized, strangling future revenue streams and diminishing the company's relevance and pricing power.

Open Text Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Open Text compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Open Text's revenue will decrease by 0.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.4% today to 16.2% in 3 years time.
• The bearish analysts expect earnings to reach $837.0 million (and earnings per share of $3.24) by about August 2028, up from $435.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.2x on those 2028 earnings, down from 18.1x today. This future PE is lower than the current PE for the CA Software industry at 38.1x.
• Analysts expect the number of shares outstanding to decline by 3.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.34%, as per the Simply Wall St company report.

Open Text Future Earnings Per Share Growth

Risks

• The accelerating shift to cloud, AI, and cybersecurity-supported by both secular and customer trends-is leading to rapid growth in cloud bookings (up 32% year-over-year in Q4) and a projected 3-4% cloud revenue growth in fiscal 2026, which could drive sustained revenue and ARR expansion for Open Text.
  
• The successful divestiture of a non-core mainframe business and aggressive business optimization plan have resulted in higher adjusted EBITDA margins, with the company expecting to realize $490-$550 million in annualized savings by fiscal 2027, which could further improve profitability and expand net margins over time.
  
• Persistent high renewal rates for both cloud (96%) and off-cloud (91%), alongside a 13% increase in total cloud RPO and a strong pipeline up 30% year-over-year, indicate durable, recurring revenue streams that de-risk future earnings and revenue growth.
  
• Expansion of strategic partnerships with leading technology providers such as SAP and Microsoft and the launch of the Titanium X platform for AI and security open up new market opportunities and enhance product differentiation, supporting higher customer acquisition and top-line growth.
  
• The company's increased capital return strategy-including a 17-20% targeted growth in free cash flow for fiscal 2026, share repurchases, and a 5% dividend raise-combined with disciplined M&A activity, suggests continued shareholder value creation through higher earnings per share and capital returns.

Valuation

• The assumed bearish price target for Open Text is $28.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Open Text's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $48.0, and the most bearish reporting a price target of just $28.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.2 billion, earnings will come to $837.0 million, and it would be trading on a PE ratio of 10.2x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of $30.91, the bearish analyst price target of $28.0 is 10.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.