Citrix Has Plenty to Prove

NEW YORK (TheStreet) -- Desktop virtualization giant Citrix , whose stock is down 26% over the past month, is still struggling to meet investors' high expectations.

There has always been plenty to like with Citrix's business but I believe the stock has been priced for perfection, which introduced plenty of risk. But Citrix hasn't been alone in this.

The Street has always had a love affair with companies having anything to do with the "cloud." VMware and Red Hat , which have enjoyed above-average multiples and P/Es of 45 and 53, respectively, are perfect examples. Unfortunately, the growth expectations presumed by these valuations have not manifested into results.

In the case of Citrix, which has established itself as the go-to vendor for IT virtualization services and remote desktop technology, the company is rethinking its approach because enterprises are delaying system upgrades. Now, given VMware's relative performance, I do believe Citrix's struggle is more market-related than, say, a lack of execution. The dismal numbers we've seen from enterprise titans IBM and Oracle supports this theory.

Nonetheless, it is worth asking: If enterprises are in no rush to reinvest in their system gear, are they proclaiming they no longer consider virtualization services a top priority? Given that overall IT spending is still down across the board, it's premature to say one way or another if this is the case.

But given that this stock -- even on this pullback -- is still relatively expensive, investors still holding here should realize it may be a while before Citrix demonstrates any sign of strength. The good news is Citrix will report third-quarter earnings on Wednesday. To the extent that management can prove to investors it has a strong pulse in this industry, this stock may finally reach bottom and then turn around.

Wednesday, the Street will be looking for Citrix to post 69 cents in earnings per share on revenue of $714 million, which would represent 11% year-over-year revenue growth. That's not a robust number relative to Citrix's historical performance where revenue growth has exceeded 20%. In this weak IP spending environment it's still not a cakewalk.

While Citrix management has done a decent job meeting analysts' estimates, the entire virtualization market is going through a transitional period where strategic partnerships with, for instance, Cisco have been advantageous to both Citrix and VMware. But there are also signs that the market has gotten saturated.

To that end, investors should also focus on how Citrix performs in product and license revenue, which have been less than stellar of late. It will be encouraging if Citrix can regain the momentum it demonstrated earlier in the year when that business posted growth of 17%.

Last but not least, revenue from license updates will give investors insight to how strong of a pipeline management has built in terms of recurring business. The strength of Citrix's pipeline has (in the past) helped the company offset the weak corporate spending environment.

The other issue to note will be the progress of Citrix's mobile strategy, which the company initiated with its acquisition earlier this year of mobile device management company Zenprise. To differentiate itself from VMware and Red Hat, Citrix is looking to leverage its current mobile suite that includes GoToMeeting, Podio and ShareFile.

The question, though, is to what extent Citrix can duplicate its PC success in the realm of mobile. In that regard, the investment case for this stock will be based on how quickly management is able to build Citrix's capabilities into cloud-based technologies that maximize mobile utilization. Not to mention, these services will need strategic pricing that meets both the company's growth demands and shrinking IT budgets.

I've never been a fan of stocks that are priced for perfection. While I do believe Citrix will eventually emerge out of this rough patch, I can't ignore the challenges ahead, especially given the premium this stock still carries. Until there are clearer signs that management is able to revive the company, I'm going to remain on the sideline here.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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