Web 2.0 refers to the new age of software products and services. This includes cloud computing, social networking, virtualization, and several other recent technological advances. This space is expected by analysts to have enormous growth over the next few years.
Investors are willing to pay high premiums for stocks of companies at the forefront of the Web 2.0 movement. Citrix Systems (CTXS) is becoming a leader in on demand IT services, and its stock does not trade at multiples as high as its competitors, yet its expected growth is similar to that of its competitors.
Due to the recent economic downturn, Citrix is trading at $56.14, which is much lower than its 52 week high of $88.49. In this article, I explain how investing in Citrix Systems is a relatively cheap way to hold a long position in Web 2.0.
Citrix offers a pretty wide variety of products and services, but it is best known for GoToMeeting. Citrix shares currently trade at a P/E ratio of 31.83, which is high for the current market, but is low when looking at competitors. For example, VMware (VMW) trades at a P/E ratio of 68.8, and Red Hat (RHT) trades at a P/E ratio of 62.72. If comparing Citrix to cloud computing companies, its P/E ratio looks tiny compared to Salesforce.com’s P/E ratio of 597.81 and NetSuite’s net loss and shares that trade at ten times revenue.
In addition to trading at a lower earnings multiple, Citrix has a lot of expected growth. With a current EPS of $1.76, Citrix is expected to have an EPS of $2.76 by the end of 2012, which is an increase of 56.8 percent. This gives Citrix shares a P/E ratio of 20.34 by the end of 2012 if Citrix shares trade at the same price. VMWare would have a P/E ratio of 35.88 in 2012 if its price stayed constant and it met its earnings estimates. Red Hat would trade at 32.13 times earnings and Salesforce.com would trade at 66.08 times earnings. Netsuite is expected to be profitable by the end of 2012, but would still trade at a staggering 102.79 times earnings.
I believe that Citrix has the potential to become one of the leaders in cloud computing and virtualization. Its products and services are well designed and it has the reach (100 million users per day) to market new products and expand on current ones. In a few years, it has a chance of being a dominant player in the technology sector. I expect Citrix to continue to grow and be one of the few stocks in the high-priced, Web 2.0 space to grow over the next couple of years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.