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The Final Piece of the Puzzle:

The Canadian Investor’s Guide to the Artificial Intelligence Revolution

® The Final Piece of the Puzzle: The Canadian Investor’s Guide to the Artificial Intelligence Revolution
® The Final Piece of the Puzzle: The Canadian Investor’s Guide to the Artificial Intelligence Revolution
® The Final Piece of the Puzzle: The Canadian Investor’s Guide to the Artificial Intelligence Revolution
® The Final Piece of the Puzzle: The Canadian Investor’s Guide to the Artificial Intelligence Revolution
® The Final Piece of the Puzzle: The Canadian Investor’s Guide to the Artificial Intelligence Revolution

The Final Piece of the Puzzle:

The Canadian Investor’s Guide to the Artificial Intelligence Revolution

Welcome Foolish Investor,

Way back in 2002, there was a small party for Google shortly before the company held its IPO. A journalist badgered Google co-founder – and future CEO – Larry Page with questions, wondering how the company could possibly stand out among the dozens of search engines in the world.

Page’s answer was short, and to the point: “Oh, actually we’re building artificial intelligence.”

Now my team and I would like to introduce you to a Canadian company that’s also building artificial technology.

While artificial intelligence (or AI) has long seemed like a technology more fit for science fiction than investing – today it’s suddenly become a breakthrough technology. At The Motley Fool Canada, we firmly believe AI will be as transformative as the birth of the Internet itself.

In The Final Piece of the Puzzle: The Canadian Investor’s Guide to the Artificial Intelligence Revolution, you’ll find access to our top artificial intelligence recommendation – OpenText (TSX: OTEX). Bear in mind, this report contains exclusive research only available to subscribers, so we ask that you keep it to yourself. Simply read on to get the full story now.

And thank you for joining Stock Advisor Canada!

story now. And thank you for joining Stock Advisor Canada ! Jordan DiPietro General Manager, Motley

Jordan DiPietro

General Manager, Motley Fool Canada

OPEN TEXT (TSX: OTEX) By Taylor Muckerman A wave of digitization continues to envelop companies

OPEN TEXT (TSX: OTEX)

By Taylor Muckerman

A wave of digitization continues to envelop companies around the world, and OpenText’s vision of a “digital-first world” is ready to take investors along for the ride.

WHY BUY:

• As processing information increases in importance, OpenText’s Enterprise Information Management (EIM) will be the funnel that helps organizations derive actionable insights. And, it’s Magellan AI-powered analytics platform will be a big reason why.

• The nature of OpenText’s business results in a customer’s reluc- tance to switch; more than 70% of OpenText’s revenue is consid- ered recurring.

• A rapidly expanding playbill of cloud customers — including Coca-Cola and Nestle — resulting
• A rapidly expanding playbill of cloud customers — including Coca-Cola
and Nestle — resulting in 25.6% revenue growth in Fiscal Year 2017.
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Aug 15
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HQ:

Waterloo, Ontario

Website:

www.opentext.com

Industry

Application Software

Volatility

Medium-High

Market Cap

CAD $11,290

Cash / Debt

C$561.8/ C$3,256.1

Revenue (TTM)

C$2,902.9

Earnings (TTM)

C$1,299.6

Total Inside Ownership

2.1%

Recent Price

C$42.73

Yield

1.2%

Dollar amounts in millions except recent price. TTM = Trailing 12 Months As of August 7, 2017

“15 years ago, you could be Amazoned, today you could be Ubered, which is a reflection of digitalization.” – Mark Barrenechea, OpenText (TSX:OTEX)(Nasdaq:OTEX) President & CEO

That quote stuck out to me in one of the first OpenText earnings conference calls I tuned into back in late 2014.

In one concise statement, he compared Amazon – a mon- ster long-term stock and one of the top recommendations in Motley Fool history – to Uber, a then-startup now valued more highly than just about every TSX-listed company.

What do Amazon and Uber have in common? Both utilized digitalization to disrupt long-standing paradigms in how commerce and transportation were “supposed” to operate.

That’s the promise of technology. No company, or industry for that matter, appears to be safe due to the broad swaths of information readily available to those who want to harness its power. That power is a better understanding of customers, logistics, markets, or, more simply, the enterprise.

Surprisingly, the vast majority of companies still remain unprepared to process the huge amount of data that swirls around their enterprises. OpenText realizes this and has placed itself directly in the chauffer seat on the road to digital transformation, making Artificial Intelligence it’s latest driver.

The Company

OpenText graduated from the University of Waterloo after completing its “thesis” — that is, after it digitized all 60 million words of the Oxford Dictionary. With this newly invented search engine technology in tow (the first of its kind), it crossed the stage as a university research project and emerged as a fully incorporated entity in the summer of 1991.

Soon after, Open Text found itself employed by the likes of Yahoo! in the early stages of the 1990s Internet boom. Since these humble beginnings, however, its penchant for innovation has helped build OpenText into a company that today generates close to $2.3 billion in annual revenues.

Through a successful blend of organic and acquisitive growth, OpenText is now regarded as a

Through a successful blend of organic and acquisitive growth, OpenText is now regarded as a “global go-to leader” in Enterprise Information Management (EIM). Beginning with its first acquisition in 1995, OpenText has added more than 50 businesses into the fold by way of acquisition.

At the helm of the majority of these deals was Tom Jenkins. Brought on in 1994 as the company’s chief operating officer, he went on to become the president and chief executive officer, and is now chairman of the board. Jenkins’ old CEO office has been occupied by Mark Barrenechea since 2012, the same year he joined the company.

As things stand, OpenText boasts a qualified CEO at the helm, its own promising business lines to grow, and a balance sheet well-equipped to keep on spending over the next few years. It’s this combination that makes me believe that the market is at risk of missing out on the full picture.

The Business

(Forewarning: the word “data” is used quite a bit through- out the remainder of this report.)

Imagine that every byte of digital data in the world could be neatly structured into the columns and rows of an Excel spreadsheet. That’s what people more technically inclined than me call “structured data,” and in the early days of the Information Superhighway it was how, well, information was organized.

But the simple truth is that unstructured digital data is the future.

According to International Data Corp. (IDC), unstructured (or “file-based,” as it’s called) data storage usage grew at a compound annual growth rate (CAGR) of 61.8% from 2007 to 2014. Compare that to structured, or “block-based,” data, which “only” grew at 23.7% annually over the same period.

What’s responsible for this separation? Over the past several years, “rich media” (e.g., movies, music, pictures, etc.) has taken over the digital space. This is a twofold phenomenon—not only is a growing level of content incorporating these forms, but rich media data is also much larger than the traditional text to which Excel wizards have become accustomed.

Also according to IDC, in 2014, unstructured data storage levels reached 69 exabytes (EB) versus “just” 11EB for structured data. That’s six times the level of data that can be analyzed through traditional means, leaving the vast majority of information out there tough to discern connec- tions and patterns from.

Enter OpenText …

In the company’s own words, OpenText and its EIM soft- ware help clients “attain 360-degree views of their big data

and analytics by streamlining organizational workflows, increasing the quality of information and creating integrated user interfaces for end users within a single source platform.”

The company also has a cloud business (added in 2013) that already contributes 30.8% of total revenue. In my mind, OpenText’s moat is growing deeper and wider with every YouTube upload.

And now, as the title of this report may hint at, OpenText is unleashing the power of machine learning to help extract even more insight from these exabytes. And, much like its intent, it’s named after the famed Portuguese navigator, Ferdinand Magellan.

The AI Opportunity

Built to compete against the likes of IBM’s Watson and SAP’s Leonardo, OpenText considers its Magellan offering quite unique because of its open source operations, making it much more customizable. It’s Chief Marketing Officer has called Magellan the “AI platform for the masses.”

My not-so-bold claim: If you’re looking for a segment of OpenText’s business that is going to be its next big catalyst, then Magellan is likely it. It’s still early days (just released to the “masses” in July 2017), but with an expected US$12.5B opportunity in the cognitive and AI systems market ($46B by 2020), OpenText’s past success at entering new markets is encouraging.

To be sure, it’s encroaching on some pretty large companies’ territory. To combat their entrenchment, Magellan has been priced at about 1/6th of Watson’s going rate, it’s open source (as I mentioned) and it runs on commodity hardware. And, according to Mr. Barrenechea, “Watson is junk.” I’ll have to take his word for it because I’ve only experienced Wat- son in commercials (that I know of), but that kind of public confidence doesn’t generally emerge without something of substance to back it up.

Another thing to keep in mind when considering Magellan as a reason to plunk some cash down in OpenText is that the company openly admits that it could take upwards of a decade for AI to be automated -- OpenText’s ultimate goal.

Thankfully, we Fools are long-term investors who wouldn’t mind waiting if the next 10 years turn out the same market-trouncing returns as the last 10 (336.9% not including dividends versus jus 12% for the S&P/TSX Composite index).

Risks & Considerations

As with most industries within the technology space, con- tinual advancements in products and services are critical to staying ahead of the pack. Thus far, OpenText has been able to stay ahead both with organic growth and through

acquisitions. Disappointment in either could be a setback, especially on the acquisition front. At the

acquisitions. Disappointment in either could be a setback, especially on the acquisition front.

At the moment, management has several acquisitions from the last year to finish integrating. Now, while it has a more-than-impressive track record when doing so, a slip- up during integration or overpaying for a future tack-on could result in meaningful write-downs, lost time, or both. Thus far, nothing has happened to foster hints of doubt, but it’s still worth keeping any eye on.

In terms of client-specific risk, OpenText is quite diverse across the board. At the end of FY2016, there wasn’t a single customer that made up more than 10% of total revenue. Geographically, revenue streams rush in from all around the globe, with the majority (57.5%) flowing from the Americas. This creates an established base with which to branch out from, though management has stated it is comfortable growing in stable locales while Europe and certain countries in Asia become less turbulent.

One last risk to mention, and one that has been making headlines over the past year or so (though not for Open- Text), is that of information security.

What’s that saying? With great data comes great responsi- bility? Or something like that…

Regardless of how you want to say it, privacy and security are of the utmost importance. Any missteps here could lead to the loss of clients and a tough road ahead in attracting

new ones. Much like the acquisition front, OpenText has a great track record with security and therefore this factor doesn’t cause us much anxiety. To be clear, though, past performance is no guarantee of future performance.

Final Thoughts

Google processes petabytes of data each day. eBay and PayPal handle millions of transactions each day.

And that’s just three companies (albeit three very successful companies).

As a result, collecting, managing, analyzing, and building out strategies to act upon the knowledge gained will set many companies apart. Need proof? A 2014 McKinsey paper highlighted that “digital transformation can boost the bottom line by 50% over the next five years.” We’re roughly halfway there, and OpenText is doing its part to help.

Now, I don’t know about you, but a 50% boost to ANY line other than expenses, interest, or taxes sounds pretty darn exciting to me. Thankfully for the companies wise enough to get a head start, OpenText is there to guide them through and provide the tools necessary to succeed in the digital age. And, Open Text’s services aren’t just for its customers. They also provide investors with the opportunity to gain access to a high-margin, rapidly growing innovator with its finger on the pulse of the digital age.

Onward!

Disclosure: All figures as of 8/7/2017 unless otherwise noted. All dollar amounts are represented in Canadian Dollars, unless otherwise noted. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), and Amazon. Tom Gardner owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, eBay, Open Text, and PayPal Holdings. Jordan DiPietro owns

This report is: (a) for general

information purposes only and not intended as investing advice; and (b) not to be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, recommendation, or sponsorship of any entity or security by the Motley Fool Canada, ULC, its employees and affiliates (collectively, “TMF”). This report represents the opinion of the individual author and does not attempt to give you professional financial advice or advice that relates to your personal circumstances. © 2017 The Motley Fool Canada, ULC. All rights reserved. The Motley Fool, Fool and the jester logo are registered trademarks of The Motley Fool Holdings, Inc. Published by: THE MOTLEY FOOL CANADA, ULC 1959 UPPER WATER STREET P.O. BOX 997 HALIFAX , NOVA SCOTIA B3J 3N2 This publication is for general information purposes only. The studies in this report are not complete analyses of every material fact regarding any company, industry, or investment and they are not “buy” or “sell” recommendations. This publication is provided with the understanding that the authors and publisher are not engaged in the rendering of personalized investment advice. It also should not be used or construed as an offer to sell, a solicitation of an offer to buy, or an endorsement, or sponsorship of any entity or security by The Motley Fool and its affiliates. The opinions expressed here are subject to change without notice, and the authors and The Motley Fool make no warranty or representations as to their accuracy, usefulness, or entertainment value. Data and statements of facts were obtained from or based upon publicly available sources that we believe are reliable, but the individual authors and publisher reserve the right to be wrong, stupid, or even foolish (with a small “f”). Remember, past results are not necessarily an indication of future performance. The authors and publisher specifically disclaim any responsibility for any liability, loss, or risk, personal or otherwise, incurred as a consequence, directly or indirectly, of the use and application of any contents of this publication. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of The Motley Fool holdings, inc.

shares of Alphabet, Amazon and PayPal. Taylor Muckerman owns shares of Alphabet, Amazon and PayPal

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