A Bright Future for Open Text

Vladimir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In today's world where companies are buried in information, enterprise content management (ECM) systems are seen as a must for serious businesses. These systems help enterprises control their content, boosting their effectiveness and productivity. One of the companies that sells ECM systems is Open Text (NASDAQ: OTEX). Its stock is up 25% year-to-date, with most of the gains built in the last month. Will this momentum continue?

Open Text is recognized as one of the ECM leaders in Gartner Magic Quadrant. Its flagship Open Text ECM competes with Oracle's (NYSE: ORCL) WebCenter Content, IBM's (NYSE: IBM) ECM and EMC's (NYSE: EMC) Content Management. Open Text shares have outperformed its competitors’ shares this year. Oracle is up 3% year-to-date, IBM is up 10% and EMC is down 2%.

ECM growth

ECM systems operate in an interesting market because the amount of content generated by businesses is growing exponentially. The ECM market is projected to grow from $5.1 billion in 2013 to $9.3 billion in 2017, an 82% growth. The companies that manage to establish themselves on this market will be in a good position to profit from this trend.

What is expected from an ECM system? First of all, a major requirement is document management and image processing. Image processing is necessary for capturing and managing images of paper documents since in today’s digital world, paper documents still play a significant role. Unfortunately, they are not searchable and cannot be used for fast decisions until digitalized. Web content management is also expected from ECM systems, and social content management as well. The companies that deliver the most comprehensive and easy-to-use systems will thrive while others would run into trouble.

Market landscape

Total revenue for Open Text grew 16% year-over-year in the company's most recent quarter. One of the main sources for growth continues to be a partnership with SAP. Open Text has a resell partner agreement with SAP, providing an extensive sales channel for the company.

Open Text provides products that are relatively easy to implement and which can interact with the products of other vendors, which is clearly a competitive advantage. EMC systems are weaker on this front. EMC’s flagship product, Documentum, is thought to be more complex than its competitors’ solutions. Oracle has a strong position with its wide ecosystem of enterprise solutions, and the same thing could be said about IBM. These two gigantic companies have a wide range of products and a large customer base, allowing them to enjoy the benefits of selling ECM systems to existing customers of their other solutions.

Valuation

Open Text is attractively valued. The stock trades at 12 forward price-to-earnings ratio. If we compare this to Oracle’s 11.78 forward price-to-earnings ratio, IBM’s 11.39 forward price-to-earnings ratio and EMC’s 11.95 forward price-to-earnings ratio, we would see that the market values those companies almost equally. Open Text is a much smaller company, however, and it is therefore easier for Open Text to deliver growth. The ECM market is expected to grow at a fast pace, and Open Text is more exposed to this market in comparison to its competitors because they provide a ton of other solutions. This is why Open Text’s gain from ECM growth will be more significant.

Bottom line

Open Text operates in a very interesting market that is expected to grow at a good pace. This is rare in today’s environment of cutting IT budget costs. The company has recently initiated a dividend that yields 1.67%, in line with IBM’s 1.82% and EMC’s 1.62%. The stock is attractively valued, and, in my opinion, will continue to build on its recent momentum.

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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Open Text . The Motley Fool owns shares of EMC, International Business Machines., Open Text , and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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