It's not uncommon to find at least one or two contrarian analysts on a well-known tech company, but the environment around Citrix Systems (Nasdaq:CTXS) is more interesting than most. Simply put, there's a split between analysts who believe desktop virtualization and an all-around focus on cloud infrastructure will propel this into a major player, and those who believe desktop virtualization will never really take off and that competition in other markets will punish Citrix for its ambition. Where there's a split like that, there can often be both elevated risk and opportunity.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A First Quarter with Some Interesting Moving Parts
Citrix reported 20% top-line growth, which was enough to beat the average estimate. License revenue rose 19% on a 17% increase in desktop license revenue, while the company also saw strong growth from NetScaler (up 46% year on year) and SaaS (up 21%). Bookings were also very solid at 24% growth.

Margins and profits were decidedly mixed. GAAP gross margin fell about two points on both a sequential and annual basis, while GAAP operating income was flat from last year and down substantially from the prior quarter. On a non-GAAP basis, though, performance was considerably stronger and the company's adjusted operating margin of 23.5% was comfortably above the average estimate of about 22%.

Readers can argue about the relative merits of GAAP/non-GAAP accounting for tech companies, but the fact remains that GAAP results seldom influence these stocks to the same extent.

SEE: What is the difference between IAS and GAAP?

Diversification Seems to Be Working
Citrix is not afraid to take on some rather large and successful companies in its quest to be a diversified cloud infrastructure company. Citrix is targeting part of the application delivery market with NetScaler, putting it up against Cisco (Nasdaq:CSCO) and F5 (Nasdaq:FFIV), but as the NetScaler revenue growth this quarter would suggest, business is going well. Likewise with the company's Branch Repeater products that compete against Cisco and Riverbed (Nasdaq:RVBD) in WAN optimization.

In server virtualization Citrix is still trailing VMware (NYSE:VMW) and I'm not sure that the company is really gaining ground here. In SaaS, though, the company seems to be more than holding its own against Cisco, Microsoft (Nasdaq:MSFT) and LogMeIn (Nasdaq:LOGM).

The Desktop Question
The biggest debate on Citrix, apart from whether rivals like Cisco, VMware and F5 will squash Citrix in their respective markets, is the real opportunity in desktop virtualization. Bulls say that this is simply part of the future of enterprise IT and that we're in the early years of what will be a wholesale adoption. Bears counter that it's a limited opportunity, where the low-hanging fruit is in the bag and that growth will soon decelerate.

As in most debates, the truth is probably in between. Just as there's no such thing as a truly paperless office, virtualization is not going to be everywhere. That said, there are a lot of potential advantages to large and/or decentralized corporations. Consequently, I think that the market is larger than the bears believe, but will take longer to penetrate than the bulls project.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
I'm so accustomed to cloud/SaaS/virtualization stories being ridiculously expensive that I almost don't trust my own valuation analysis on Citrix. As it so happens, while I expect a very rapid pace of growth, it may actually be the case that these shares are undervalued.

Projecting 15% compound free cash flow growth for the next decade seems extremely ambitious, but I'm projecting less revenue growth for Citrix than for VMware or F5, as well as lower free cash flow margins, and a higher discount rate. Yet, after all that, Citrix actually looks as though it may be the cheaper stock of the three. While I struggle with the notion that a stock trading at six times trailing revenue or 23 times trailing EBITDA could be "cheap," the debate on Citrix's potential may just mean that bulls have more room to run here.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    Has Apple Finally Hit the Wall With the iPhone?

    We look at how the iPhone has sold over its brief existence and what that means for the future of the smartphone market.
  5. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  6. Investing

    The Top Businesses Nurtured By Y Combinator

    We look at the top startups that were incubated at Y Combinator, one of the world's most popular business incubator firms.
  7. Investing

    Is It Time To Bet On The iPad Again?

    Apple's focus on iPad has been fairly tepid these past few years. But, the iPad Pro was the centerpiece of the company's latest product announcements. Why?
  8. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  9. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  10. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!