Stock Analysis

Here's Why We Think Open Text (NASDAQ:OTEX) Is Well Worth Watching

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NasdaqGS:OTEX
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Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. Loss-making companies are always racing against time to reach financial sustainability, so investors in these companies may be taking on more risk than they should.

If this kind of company isn't your style, you like companies that generate revenue, and even earn profits, then you may well be interested in Open Text (NASDAQ:OTEX). Even if this company is fairly valued by the market, investors would agree that generating consistent profits will continue to provide Open Text with the means to add long-term value to shareholders.

View our latest analysis for Open Text

How Quickly Is Open Text Increasing Earnings Per Share?

The market is a voting machine in the short term, but a weighing machine in the long term, so you'd expect share price to follow earnings per share (EPS) outcomes eventually. That makes EPS growth an attractive quality for any company. Open Text managed to grow EPS by 10% per year, over three years. That growth rate is fairly good, assuming the company can keep it up.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. On the one hand, Open Text's EBIT margins fell over the last year, but on the other hand, revenue grew. So if EBIT margins can stabilize, this top-line growth should pay off for shareholders.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

earnings-and-revenue-history
NasdaqGS:OTEX Earnings and Revenue History November 14th 2023

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Open Text.

Are Open Text Insiders Aligned With All Shareholders?

Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

Although we did see some insider selling (worth US$1.4m) this was overshadowed by a mountain of buying, totalling US$13m in just one year. We find this encouraging because it suggests they are optimistic about Open Text'sfuture. We also note that it was the Independent Chairman of the Board, Paul Jenkins, who made the biggest single acquisition, paying US$8.1m for shares at about US$29.12 each.

The good news, alongside the insider buying, for Open Text bulls is that insiders (collectively) have a meaningful investment in the stock. We note that their impressive stake in the company is worth US$218m. This suggests that leadership will be very mindful of shareholders' interests when making decisions!

Should You Add Open Text To Your Watchlist?

As previously touched on, Open Text is a growing business, which is encouraging. In addition, insiders have been busy adding to their sizeable holdings in the company. That makes the company a prime candidate for your watchlist - and arguably a research priority. Still, you should learn about the 3 warning signs we've spotted with Open Text (including 1 which is a bit concerning).

The good news is that Open Text is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

Valuation is complex, but we're helping make it simple.

Find out whether Open Text is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.