Seeking Alpha
What is your profession? ×
Tech, banks, long/short equity, value
Profile| Send Message|
( followers)


The majority of analysts (56%) rate Citrix as a buy, with a median price target of $65.

Citrix has staked its claim for a strong portion of the cloud/virtualization market going forward.

I project the stock to reach $70 in the next 12 months, on the basis of continued earnings and free cash flow growth.

In the tech sector, the market sometimes takes a "who cares" attitude whenever the word "valuation" is raised. This is regardless of the logic value investors may present. While enterprise software vendor Citrix Systems (NASDAQ:CTXS) has been a dominant force in the virtualization/cloud industry, the stock has struggled amid growing concerns of weak enterprise spending, including a 40% decline over the past two years. For that matter, rivals VMware (NYSE:VMW) and Red Hat (NYSE:RHT) have not fared any better.

Given how this sector often trades in tandem, investors automatically assumed that the struggles of one company will immediately translate to the other. While the cloud and virtualization market appears to be doing performing moderately better, enterprise spending still has not returned to their robust levels. The question is, when things do get better, which company stands to outperform its peers. On Wednesday, Citrix made that answer a little easier.

The company reported first-quarter revenue and earnings per share that topped analysts' expectations. For the quarter ending in March, Citrix posted revenue of $750.8 million, which jumped roughly 12% year-over-year. Ahead of the report, analysts had been modeling for revenue of $733 million. This continues the company's streak of double-digit revenue growth that now spans five consecutive quarters. Equally impressive, during that span, revenue has increased by an average of 16%, including a 19% surge in the January quarter.

Also impressive was the fact that Citrix grew revenue from license updates by double-digits. This means that the company has a healthy pipeline of recurring business; an advantage that can help Citrix offset the type of near-term headwinds that VMware and/or Red Hat may experience.

In terms of profits, Citrix delivered earnings per share of 64 cents, which beats analysts' estimates by more than 8%. Analysts were looking for 59 cents per share. It seems the Street had underestimated the company. Estimates had fallen ahead of the report. As with the company's strong revenue streak, Citrix has seen its net income grow by an average of 22% over the past four quarters. So it's a little surprising that the stock has performed so horribly. But things are about to change.

For the current quarter, the company guided for revenue in a range of $765 million to $775 million, and earnings per share of 57 cents to 59 cents. While these figures are lower than what analysts had hoped (est. $785 million and 67 cents), the numbers do signal that the worst is over. Because for the full year, the company raised its outlook to a range of $2.90 to $2.95 per share, up from a prior guidance of $2.85 to $2.95 per share. That is above consensus for $2.91 per share.

While these numbers aren't exactly breathtaking, on a relative basis, they are a strong beat. This also addresses my earlier question. As much as I like all three companies, there will come a point when the market decides it no longer can support all three names, due to saturation. It happens in every industry. From my vantage point, Citrix has staked its claim for a strong portion of the market going forward.

This does not mean that VMware and Red Hat should pack up their tents. The real winner won't be decided for (at least) two more years. But given Citrix's partnership with (among others) Cisco (NASDAQ:CSCO), it's tough to bet against the enterprise advantages this presents. This now makes Citrix an interesting stock to follow.

The majority of analysts (56%) rate Citrix as a buy, with a median price target of $65. The high price target is $85, which I consider a bit too aggressive. There are still unanswered questions that need to be considered, not the least of which has to with the projected growth of the cloud/virtualization market. Not only is that industry still in transition, IT managers will need to decide how much of a priority virtualization will remain. What is clear, however, is that Citrix will not leave it up to chance. And I project the stock to reach $70 in the next 12 months, on the basis of continued earnings and free cash flow growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.