Here's the analysis, Chuzzlewit. Thanks, and sorry for the offbeat formatting:
===
If you can stomach volatility, Citrix still looks
attractive.
Despite its recent vertigo-inducing runup, Citrix
CTXS stock definitely merits examination if you're
willing to add a volatile tech holding to your
portfolio. Citrix develops thin-client software,
which allows users to access Windows applications
remotely, as opposed to installing Windows on their
desktop. Thin clients are computing devices with
stripped-down software and storage (hence "thin")
that let users access these applications. Normally,
using applications in this manner would be
egregiously slow, but Citrix software does things
like refresh your screen, mouse clicks, and
keystrokes while keeping the rest of the heavy
processing activity on the server.
After a false start, thin client devices are starting
to multiply briskly. According to research from
International Data Corporation, approximately
305,000 of these devices were shipped the first
half of 1999 compared with 368,000 for all of last
year.
The surge in the thin-client market is reflected in
Citrix's financials. Revenue for the third quarter of
1999 rose to $106 million, up 56% from the
corresponding period last year. Net income rose
even faster, at a 74% clip, boosted by much
stronger margins. Although it's growing almost as
fast as many Internet companies, Citrix
distinguishes itself by having been profitable for
each of the last 5 years.
Fortunately, Citrix is lessening it dependence on
Microsoft MSFT - royalties received from Microsoft
accounted for 9.4% of Q3 net revenues, down from
14.8% the corresponding period last year. Until
recently, Citrix and Microsoft had been joined at
the hip. In just one day in 1997, Citrix stock lost
60% of its value on speculation that the Bill Gates
empire would compete with it. Shortly thereafter,
Citrix struck a Faustian bargain, collaborating with
Microsoft on software development, pursuant to
this licensing agreement, Microsoft agreed to pay
Citrix $100 million ($85 million has been paid so
far) in royalties. This has paid off handsomely for
Citrix, but a non-compete clause that kept
Microsoft at bay during these years is expiring.
Although Citrix technology is vastly superior to
Microsoft's analogous product
microsoft.com
right now, Microsoft
may now try to crush Citrix in this market (or just
purchase Citrix outright).
The major catalyst for Citrix's outperformance (it's
up nearly 150% for the year) has been the
application service provider (ASP) market, a
burgeoning industry providing software through the
Internet on a "rental" basis. Citrix wants to be "the
Cisco of ASPs",
redherring.com
and is in fact co-developing ASP
technology with Cisco. At least 14 ASPs have
partnered with Citrix to be licensees of Citrix
technology.
ASP stocks are on fire, trading as high as 100 times
sales with no profitability in the foreseeable future,
making Citrix's valuation look relatively tame.
Since the stock was added to the S&P500 at the end
of October, index fund managers have backed the
truck in, boosting the forward P/E to a pricey 60.
True, the last few weeks may have stretched the
valuation for Citrix stock. Nevertheless, if you can
withstand the volatility, it should be a great tech
holding for the long run, even at its current price.
Note: Analyst owns shares of company.
[ADDITIONAL OUTSIDE LINKS]
thinplanet.com Another Microsoft RDP vs. Citrix ICA comparison
thin2000.com Windows2000 and Thin Client Guide
Subject 32027
Stock Discussion: "Web Desktops, Web Applications, Thin Client"
Citrix CTXS
The Bulls Say
ú The company has exhibited consistent earnings growth, and revenue continues to grow at a torrid pace.
ú The developing market for application service providers (ASP) is growing rapidly and Citrix may be one of the greatest beneficiaries.
The Bears Respond
ú Microsoft's non-compete agreement with Citrix has expired, turning a partner into a potential fierce competitor.
ú The ASP market is still in its infancy and will not have a strong impact on Citrix sales for many months.
Bird's Eye View
Strategy:
Citrix is the leading vendor of thin-client software, which allows users to use Windows-based applications remotely. The thin-client market is the company's bread and butter and continues to grow quickly. Additionally, Citrix wants to be the Cisco of ASPs - providing software for the burgeoning web-based software market.
Growth A+
For the first nine months of 1999, revenue increased to $285 million, a sharp 65% increase from the same period one year earlier.
Profitability B
Return on Equity (ROE) clocks in at a strong 23.4%, although Return on Assets (ROA) is deflated due to a quadrupling of marketable-security assets in the past year.
Financial Health A-
The firm is sitting on $180 million in cash, and it has generated more than $100 million in free cash flow during 1998. Debt leverage, however, has increased due to recent issuance of $310 million in convertible debt.
Valuation D+
A forward P/E ratio approaching 60 makes this an expensive buy, like many of its tech peers.
Management
Chairman Edward Iacobucci is a leading expert in software and networking. He's also deft with handling Microsoft--in his 11-year stint with IBM [TICKER IBM], he led a joint effort with Microsoft to develop the OS/2 operating system.
Close Competitors
Microsoft [TICKER MSFT]
GraphOn [TICKER GOJO]
The Santa Cruz Operation [TICKER SCOC] |
