Splat! Citrix and Qualcomm are down, but are they out?
What goes down doesn't always come up, as these two examples of market road kill may very
well prove. Here's how to tell a disaster from a buying opportunity.
By Jim Jubak
What's your first reaction when you hear the names Citrix Systems (CTXS, news, msgs),
Qualcomm (QCOM, news, msgs), Electronics For Imaging (EFII, news, msgs) or Digital River
(DRIV, news, msgs)?
Check out our experts' latest posts
Jim Jubak
Jon Markman
More...
Do you run for the hills to get as far away as you can from these disasters (down 60%, 36%,
57% and 52% respectively in the last month alone)? Or do you say, "Back up the truck. Can't
get enough of those bargains?"
Bargains or disasters? Is there any way to tell?
I've been thinking about that a lot lately because I own one of these examples of stock-market
road kill, both personally and in Jubak's Picks. Citrix Systems went from $59.69 on June 7, to
$21.94 at the close on June 16. That's a decline of 63% in seven trading sessions. And as you
can imagine, my e-mail has been chock-full of messages asking: What to do? Is it time to sell?
To stock up on more? To buy an initial position?
Best to avoid the splat
This column is my promised attempt to answer those questions about a specific stock, Citrix,
and to see if I can derive some general wisdom for the future about what to do when a stock
goes splat.
First, let's get it right out in the open and over with: There is no doubt that the best solution to
situations like this is to never get into them in the first place. If I'd sold Citrix on June 7, I
wouldn't be looking at a 60% loss and would be able to devote this column to some more
pleasant topic. But I didn't sell. In fact, when rumors started to swirl about the stock on June 8, I
pooh-poohed them. I certainly wasn't about to sell just because a company vice president had
replaced the chief financial officer as a presenter at an important technology conference. And
when the stock fell almost $20 the next day on a single analyst report that Citrix was
discounting prices to make the June quarter, I thought the reaction was overdone and actually
bought shares. I wasn't alone in this -- the analyst who issued the warning kept a "buy" on the
stock and, while lowering his price target, dropped it only to $90. I certainly didn't figure that
Citrix shares would fall another 50% the next trading day, when the company announced that it
would report 9 cents to 11 cents a share instead of the 21 cents that Wall Street was
predicting for the quarter.
I didn't get it right for a number of reasons. I knew that Citrix had told Paine Webber on May 10
that sales were going well in the quarter and that receivables would be coming down from the
worrisome level of the prior quarter. The company apparently gave Lehman Brothers the same
positive feeling, because that firm upped its projections for revenue in fiscal 2000 by $6 million,
about 1%, on May 12. Citrix had been here before, I knew. Going into the last quarter, analysts
had worried about sales -- and the company had achieved its projections in the end. Like the
company, I figured that everything would be OK this quarter.
What went wrong at Citrix?
So what went awry at the company? Two things, both related to a change in the way the
company sells its products.
First, there's now a visibility problem. Citrix is in the middle of moving parts of its business from
selling through distributors to selling directly to large corporations. That's a critical step. If the
company succeeds at this transition, it will be able to grow revenue faster and enter new
markets. But it has greatly changed the firm's revenue pattern. Direct sales to large
corporations tend to be bigger than under the old, indirect model. But each sale also takes
longer to close -- six to nine months, management estimates -- and that means pinning down
when those sales can be booked is harder to predict. Citrix management simply doesn't have
a very accurate idea at the moment of when a deal will actually close.
I think management was guilty of some wishful thinking as the end of the quarter approached.
The company banked on some deals that aren't going to close in the quarter. Hence, the
revenue miss of about $22 million, or 16%.
Details
--------------------------------------------------------------------------------
Research Wizard
Add to my portfolio
Message Board
Research Wizard
Add to my portfolio
Message Board
And second, revenue growth going forward does indeed look to be lower than the company
had been projecting. In April and May, Wall Street was confidently predicting revenue growth in
2000 of 42% to 45%, depending on the firm. It now looks -- based on information from the
company about the pace at which large corporate deals are closing, and about reductions in
spending that will improve the bottom line, but will reduce sales growth over the next year -- like
it could come in closer to 25%.
Clearly, the old target prices, set when the company was projected to grow revenue by 45% in
2000, aren't applicable any more. Until the warning, Prudential Securities had a target price of
$130 a share, A.G. Edwards $130 and Dain Rauscher Wessels $90. (I had a target of $88 for
October in Jubak's Picks.)
You'd think that with revenue growth and earnings-per-share projections cut in half, Wall Street
price targets would have been cut in half, too. But think again. When a stock disappoints as
badly as Citrix, the Wall Street multiplier effect results in target prices coming down by 50%
and then 50% again. First, analysts cut their earnings projections for 2001 by about half in the
days after the warning -- from $1.02, in the case of Prudential -- to 52 cents. And then they cut
the multiple that they were willing to apply to that projection, again by about 50%. So
Prudential's target price for Citrix moved from $130 a share pre-warning to $22 a share after
the drop.
So what's it really worth?
All this is history, of course. The questions are: What to do about the stock going forward?
What is this stock actually worth?
After a warning like this, it's a good idea to take all estimates and projections with more than
the usual grain of salt. All the numbers are extremely fluid. Prudential, to stick with that
example, cut its estimate for 2000 earnings from 88 cents a share before the warning, to 51
cents a share on June 12. On June 13, the firm raised 2000 estimates back to 62 cents. For
2001 projections, which had dropped from $1.02 to 52 cents, went back up on June 13 to 80
cents.
Wall Street is as apt to overshoot on the downside as it is on the upside. Analysts, just like
investors, can let their emotions run away with them. When things are going well, upside
projections get inflated. Business is great today, and it will be greater tomorrow. When bad
news hits, the mood can swing just as rapidly in the other direction. A real setback in the
present can easily turn into an imagined future disaster.
The tendency to overreact on the downside gets especially pronounced in markets that are
already disposed to fretting over the future. The current market, shadowed by worries over
further interest-rate increases by the Federal Reserve and by the real possibility that economic
growth is slowing, certainly fits that description. When nobody is very firmly convinced that it
pays to stay invested in anything, overreactions are the normal reactions.
Citrix won't bounce high
Many investors know of this tendency and regularly buy stocks that have been oversold on
either the rumor of bad news or on actual bad news. It's important to realize that this strategy
has its limits. Stocks that have been sold down $10 or $14 a share on a rumor may be good
candidates for a bounce, but a stock like Citrix that has taken much more severe damage on
real bad news isn't likely to recover quickly, especially in a nervous market. And a stock that's
been as badly hurt as Citrix certainly isn't going to buck a downward, overall market trend.
Jumping immediately into Citrix in the hope of a quick bounce isn't a high-percentage move.
I can see Citrix moving up to, say, $25 to $27 a share in the relative short run if technology
stocks make a move going into or coming out of the Federal Reserve meeting on June 27.
That possibility supposes that in mid-July, the company is able to report a quarter with no more
negative surprises.
But I think the stock faces more tough going after that. Even before the warning, it looked likely
to face pressures in the third and fourth quarters from tough comparisons to those periods in
1999. In the third quarter, for example, pre-warning projections put earnings per share at 22
cents, only a 22% increase over the same period in 1999. Now that analysts have lowered their
estimates, earnings growth for the third quarter is projected at just 3.4%. In the fourth quarter,
at just 8.4%. Those aren't the kind of numbers likely to make investors flock back into the
stock.
The current quarter has demonstrated that Citrix executives aren't able to deliver accurate
guidance to Wall Street about their own company. Why should investors trust the company's
numbers for the next quarter?
That's especially true when management may not be able to deliver even those lowered
numbers. The current quarter has demonstrated that Citrix executives aren't able to deliver
accurate guidance to Wall Street about their own company. Why should investors trust the
company's numbers for the next quarter? Or the one after that? I think it's reasonable to
assume a "show me" attitude toward the stock, and wait to see that management can deliver a
quarter or two as promised. At that point, investors might have a clear picture of future growth
at Citrix again. Right now, they don't know what the trend is.
I'd say, therefore, that despite the depressed current price of the stock, I'd wait before making it
a buy. If you already own shares, as I do, I think it's probably worth waiting for any post-Fed
bounce in the general market -- if you think one is coming. But after that, I think the stock is
likely to be dead money for four or more months. I'd only hold through that period if I couldn't
think of a better place to put my money. I've set a very short-term target price of $26 for Citrix in
Jubak's Picks for those who already own the stock. I'm not recommending new purchases at
the moment.
Rules for picking up the pieces
I find several lessons in the Citrix case that I think are worth applying to other stocks that have
gone splat.
First, never assume that a stock that has been cut in half can't be cut in half again. Qualcomm,
for example, was near $180 in January and had tumbled to $90 by May. But since then, it has
fallen into the mid-$60s, and I don't see any reversal yet to the stock's downward trend.
Second, it doesn't pay to try to buck a nervous market with a damaged stock. The news out of
Qualcomm hasn't been all that terrible. Sure, the company has lost business in China that it
encouraged investors to believe it had locked up. The end of government subsidies for handset
purchases in Korea, the biggest overseas market for Code Division Multiple Access (CDMA),
certainly isn't good news. And the possibility that Globalstar Telecommunications (GSTRF,
news, msgs) will have to pull the plug on its satellite system could cost Qualcomm about 10
cents a share in earnings. But an unsettled general market has magnified the power of these
bits of news and turned it into continuous downward pressure on the stock.
Three, there's little worse for a stock than a belief among investors that management has lost
its credibility. Much of the damage to the price of Citrix is the result of investors deciding they
can't trust management to give them the straight dope. Much of the pressure on Qualcomm
results from a similar skepticism. Judging from the traffic in the Market Talk with Jim Jubak
Community, a lot of investors feel that management sold them a bill of goods by announcing a
deal with China Unicom (CHU, news, msgs) that turned out to be anything but firm.
Fourth, remember that if an expensive stock misses a quarter by 50%, the price will be cut in
half twice -- once for the missed earnings per share, and a second time to account for a lower
multiple. A.G. Edwards recently put a target price of $120 a share on Qualcomm. That's about
110 times projected fiscal 2001 earnings per share. Plenty of room there for a disappointment
to whack the stock.
Fifth, look at the trend, and not just the absolute numbers, when it comes to earnings growth.
Qualcomm is coming off a huge growth run. Earnings per share in the last four quarters have
grown by 350%, 285%, 212% and 152%. That puts projections of 52%, 35%, 36% and 49%
earnings-per-share growth over the next four quarters in a very different light. For the full fiscal
year 2000, Qualcomm is projected to grow earnings per share by 68%. In fiscal 2001, analysts
are projecting that growth will drop to 31%. Qualcomm is in the midst of making a transition, it
seems, from a supergrowth stock to merely a great growth stock. Such transitions can be
tough on a stock's price.
Finally, though, I think your decision to buy Qualcomm at this price, or to take a pass, comes
down to your own belief in management and its numbers. A 12-month target price of $120 a
share that depends on a 70 multiple to fiscal 2001 earnings seems steep for a stock that might
be growing at a rate of just 31% at that point in time. At a minimum, before I took that risk I'd
want to believe that Qualcomm management will deliver on the guidance that it has given to
Wall Street. And I'd feel a lot more inclined to take that bet if Qualcomm management had a
history of low-balling earnings and prospects for the company's future business. Personally,
before I put my money into this one, I'd like to see a quarter that delivers on projections and a
conference call that reveals a management that's talking conservatively for a change.
Like many recent columns, this one has been about nothing but technology stocks. I realize
that I've been writing about very little besides this sector for the last few months. The
technology sector has been the most volatile in the market, so I think the emphasis has been
justified. But technology isn't the only sector in the market and investing in technology stocks
isn't the only way to make money. So my next column -- if events allow -- will be called "What
else besides technology?"
Jubak's Archive
--------------------------------------------------------------------------------
Recent Jubak articles:
? No place to hide in tech stocks?, 6/16/00
? Blue chip chip stocks, 6/13/00
? Don't get caught in the Big Squeeze, 6/9/00
More?
Updates on past columns
--------------------------------------------------------------------------------
Just your typical 3-day correction?
On June 14, PMC-Sierra (PMCS, news, msgs) announced that it would acquire Malleable
Technologies, a maker of digital signal processors (DSPs) for processing voice and data on
the same line on networks using either the ATM or IP standards. The buy will help PMC-Sierra
push into a new market -- voice over the Internet -- and do it rather quickly, too. Customers
have been sampling Malleable Technologies' MECA family of chips since April, and since
PMC-Sierra owned 15% of the company before the current deal, the MECA line is already
tightly integrated with PMC-Sierra's VORTEX chip set and several of the company's interface
products. Analysts do not expect the deal to dilute PMC-Sierra's earnings. The company will
account for the transaction as a purchase.
5 stocks ready to join the party
Trading volume isn't going to be any great shakes for June, but it is shaping up as a modest
improvement over May. Through the middle of the month, Nasdaq average daily volume is
running at 1.4 billion shares, a 4% increase from last month. New York Stock Exchange daily
volume, at 0.9 billion shares on average, is about even with May. For the quarter ending in
June, volume looks like it will be down almost 12% from the March quarter. But the pickup this
month, slight as it has been, is a sign that online brokerage stocks probably won't produce
negative surprises when they report the current quarter and that analysts won't have to engage
in a flurry of earnings-estimate cuts in the next few weeks. That's good news for anyone
looking to find the bottom in a Jubak's Pick such as E*Trade Group (EGRP, news, msgs).
At the time of publication, Jim Jubak owned or controlled shares in the following equities
mentioned in this column: Citrix Systems, E*Trade and PMC-Sierra.
Jubak's Picks |
