by Jon Markman | April 28, 2010 9:49 am
Citrix Systems (CTXS[1]), a company that specializes in ”cloud computing,” has the potential to revolutionize the speed of modern devices over the next few years, and is a good buy now for tech investors.
Cloud computing, also called virtualization, is what you get when you remove the software from a device. Why might someone want to do this? Well, a handheld device such as an iPhone or even a laptop computer has limited processing power and storage capacity. A huge supercomputer, meanwhile, can process at extraordinary speeds. So Citrix sells products that help connect consumer and business devices to extremely fast servers that can be accessed virtually from any location.
Citrix focuses on the software part of virtualization and is the leader on the Windows platform with over 70 million users of its products. One of its key products is a presentation server known as XenApp that allows for software applications to be accessed remotely. Critics might speculate that security could be an issue with virtual access, but Citrix’s systems provide another layer of protection, ensuring network security.
By decoupling the operating system from the server, Citrix’s products allow software to be easily adjusted for an entire network. This technology allows for easy patch updates for operating systems, business software, and spyware programs. XenApp is also excellent for virtual business meetings because all users can be running the same software program in New York and Tokyo without technical difficulties. With increasing fuel costs, virtual meetings will be more common.
Virtualization is not just a technology fad. Tech research firm IDC estimates that servers generally operate under 10% of maximum capacity. Server consolidation reduces hardware, electricity, and cooling costs and allows for faster processing power.
Citrix has emerged as the dominant player in the desktop virtualization field. In its last earnings report, the company reported that its server virtualization arm, Citrix Essentials, grew 150% year over year. The company has established a strong foothold but does face strong competition from industry leader VMware (VMW[2]).
Management has developed an effective strategy that plays to Citrix’s competitive advantages. The company is focusing on selling virtualization products to small and mid-sized companies to avoid direct competition with VMware, which focuses on large enterprises with complex servers. Focusing on mid-market businesses has led to nearly 70% revenue growth over the past four years.
On top of focusing on a different customer group, Citrix is also emphasizing desktop virtualization, which is a relatively untapped market in which VMware has yet to gain traction. Additionally, Citrix is using its close relationship with Microsoft to incorporate its software into Microsoft’s upcoming virtualization technology.
Citrix also competes with our F5 Networks (FFIV[3]) and Cisco Systems (CSCO[4]) to sell products that improve the performance of websites and software applications that run on central servers. This process, called application networking, is a future area of growth for Citrix in which already boasts eBay (EBAY[5]) and Google (GOOG[6]) as customers.
Management also has a sizeable stake in the company, aligning its interests with shareholders. Chief executive Mark Templeton owns almost 1 million shares, and board members are required to hold at least 3,000 CTXS shares.
As a growing technology company, Citrix is positioned well for growth with $1.2 billion in cash and no long-term debt. The company has significant free cash flow that is sufficient to cover continued investment for future products.
As desktops, laptops, and even smartphones demand more power, the decision to put processing and data storage in the “cloud” will become more prevalent, and CTXS is well positioned to exploit the move by targeting small-l and mid-size business with its easy to use technology.
The stock is not cheap, trading at 29x my 2011 estimate of $1.77, but that’s about what you would expect for a best-in-class young company. If investors decide to give the same 40x valuation as VMware, the price would jump out to $71 from the current $49.44 level. That’s a lofty expectation, but it shows you where the headroom is.
For more ideas along these lines, check out my Trader’s Advantage[7] and Strategic Advantage[8] newsletters.
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