Can Citrix Live Up to Its Growth Expectations?

NEW YORK (TheStreet) -- It's always been difficult trying to decide whether or not to make a play of desktop virtualization giant Citrix (CTXS). While there is plenty to like with the company's business, I've never been a fan of stocks that are priced for perfection.

Perfection seems to be what investors are expecting from any company having anything to do with the "cloud." For investors, I cringe at what might happen should these growth expectations fail to meet perfect execution. On the other hand, Citrix continues to do what it can to see to it that this scenario never unfolds.

The Quarter That Was

In its most recent quarter, the company generated revenue of $615 million -- representing growth of 16% when compared to the $531 million it logged a year ago. For the quarter, net income arrived at 92 million or 49 cents per share which includes approximately $22 million related to the closing of audits with the IRS of previous tax years.

Excluding this cost, the company exceeded last year's earnings. As good of a performance as this was, the company also rewarded investors by announcing an authorized stock repurchase plan of up to $400 million dollars. This is on top of the approximately $87 million that remained from a previous authorization from the prior quarter.

Though guidance was not all that impressive, Citrix does deserve a considerable amount of credit for showing this level of performance in such uncertain economic climates.

But all was not well in terms of growth. That it generated 7% growth -- its lowest level in desktop licenses -- should concern investors.

I would want to know if this is a sign of things to come. After all, this area of its business is arguably its bread and butter.

If enterprises are not in any rush to upgrade their systems, it could be a while before growth in Citrix's license business show some signs of strength.

How long are investors willing to wait? With the stock already trading at a premium, there is the possibility for the stock to flat-line until its license business shows clearer direction. Another concern has to do with the competition and wondering what will they do in the meantime?

Moving Forward

Rivals such as VMware ( VMW) and Red Hat ( RHT) are not going to sit idle and wait for Citrix to sort things out. This is even though Citrix might be able to beat them on cost. What's more, the PC virtualization market won't last forever. After all, it's no secret that PCs are seeing less and less demand. This causes me to wonder what will happen should the market start focusing more on mobility. Which company will rush to set the standard?

Not to take anything away from Citrix's performance. Admittedly, the company operates a sound business in a growth industry and has an excellent management team steering the ship. I still wonder if its business fundamentals and the future of the sector support its current valuation.

As the future of IT takes shape it will be interesting to see not only what becomes of virtualization, but how the sector evolves in terms of valuation. Or more specifically, will cloud companies trade at more reasonable levels?

Bottom Line

The company's performance continues to demonstrate how corporations are depending more and more on its products and services. With that, Citrix has emerged the leader in the market by having established itself as the go-to vendor.

However, I wonder is it prudent to continue to throw valuation metrics out of windows for a market that has yet to prove which players will survive and which ones won't.

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

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

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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