A Two-for-One Technology Play

09/24/2007 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tobin Smith, editor of ChangeWave Investing, says Citrix Systems should benefit from the growth of two major technology trends. 

Citrix Systems (NASDAQ: CTXS) is the “game-over dominator” in the hosted computing space and the company is number two in virtualization software. Citrix has approximately 6,200 partners in more than 100 countries, and the company reported $1.1 billion in revenues for fiscal 2006.

CTXS shares have been relatively quiet for a while, but the combination of the green energy wave and the server virtualization wave is boosting Citrix's growth rate enough to warrant a premium P/E to the marketplace.

Via hosted computing, companies are able to get rid of the energy-sucking PCs in the office and replace them with centrally hosted application servers accessed by "thin client" terminals.

Thin-client devices are reminiscent of the dumb terminals popular during the last century but offer a cost-effective alternative to an office filled with PCs. And energy savings of up to 90% are nothing to shake a stick at, as PCs are the second-largest consumer of electricity in the average non-manufacturing office (after air conditioning).

Next come the benefits from Citrix's role in the virtualization trend.

Virtualization software helps companies big and small use a centralized computer to imitate the functions of multiple machines at a fraction of the cost, enabling companies to save money on the hardware and electricity.

Research firm IDC estimates spending on virtualization software and supporting services will swell to more than $15 billion worldwide in 2011, up from $6.5 billion last year. Billions more dollars will likely be spent on compatible equipment as this technology reaches the tipping point.

I think IDC's forecasts are very conservative. Thus far, only 20,000 companies have gone to virtualization software. That’s 500,000 servers, Gartner says, but that number should rise to two million servers by 2009.

Citrix has a $6.8 billion market capitalization, no debt, and a huge distribution channel. My feeling is that Citrix goes to a 30x P/E on $2 of earnings per share in 2009 as the virtualization wave really takes off.

I also believe that IBM, Hewlett Packard, or Cisco Systems will buy out Citrix some time before the virtualization field gets too big to join the party.

Citrix's latest results for the second quarter showed year-over-year growth in product license revenue (+16%), license update revenue (+18%), online services revenue (+47%), and technical services revenue from consulting, education, and tech support (+22%).

Citrix officials expect third-quarter net revenue to be in the range of $335 million to $343 million, compared to $278 million in the third quarter of 2006.

It's rare we get the opportunity to ride two ultra-hot waves with one stock, but that's what we get with Citrix. I see the possibility of a 50% upside with very low risk and very little downside.

Add Citrix Systems shares at or below our Buy Under of $40 with a target of $60 during the next 12 to 18 months. (The stock closed below $39 Friday—Editor.)

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