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Citrix Seen as Hot Stock for 2000


by Hal Plotkin
Silicon Valley Correspondent

“People will discover that Citrix is an enabling technology for developing applications over the Internet, and we think they’ll be willing to pay a higher premium for the stock.”


— Wendell Laidley, Credit Suisse First Boston

Networking software maker Citrix Systems Inc. {CTXS} is one of the hottest prospects for next year’s investing free-for-all, if recent reports from analysts and the media are any indication.

The stock, which we first profiled on Nov. 29, had received strong marks from the three Wall Street analysts who covered the burgeoning company, which makes software that lets users run Microsoft Windows applications on non-Windows computers.

Since then, the buzz on the company has remained mostly positive. Forbes, SmartMoney, PC Magazine, FORTUNE Magazine, Business Week and Interactive Week all named the stock as a winner for next year or as part of a group of key software or Internet stocks.

“Citrix has a lot of opportunities,” says Wendell Laidley, an analyst at Credit Suisse First Boston, based in San Francisco. “People will discover that Citrix is an enabling technology for developing applications over the Internet, and we think they’ll be willing to pay a higher premium for the stock.”

Laidley upped his 12-month price target on Citrix Systems to $145 about a month ago. His previous target, announced in October, was $83. (As of Dec. 28, Citrix was trading at $121 a share.)


Citrix One-Year Stock-Performance Chart

Laidley’s target is based on 25 times his projected 2000 revenue for the company.

“This is not a conceptual leap of faith,” Laidley says. “[Citrix is] doing very well. Somewhere around 40 percent of information-technology budgets are spent on managing [software] applications once they’ve been developed.”

Sarah Mattson, an analyst at Dain Rauscher & Wessels, based in San Francisco, shares Laidley’s enthusiasm. Mattson initiated coverage of Citrix on Nov. 12, also with a “strong buy” rating, and she raised her six-month price target from $100 to $135 several week ago.

Several factors are contributing to analysts’ optimism about Citrix’s stock.

The Fort Lauderdale, Fla.-based company has its roots in the server-based computing market, a forerunner to the newly emerging Internet-based application service provider market.

Server-based software products can run on inexpensive “thin-client” computers that don’t need a large hard disk drive. They offer businesses the opportunity to power large numbers of workstations through a single software application maintained on a central server rather than be forced to individually maintain and upgrade software applications on more-expensive desktop computers.

“We’re aggregating IT needs together to share scarce IT resources,” said Chris Phoenix, Citrix’s vice president and general manager, at an industry meeting in San Francisco.

Worldwide shipments of enterprise thin clients are projected to jump 87 percent to 1.2 million this year from 369,000 in 1998, passing the 6 million mark by 2003, according to International Data Corp., based in Framingham, Mass.

“This market is poised for strong growth as a result of recent price reductions to Microsoft’s Windows Terminal Server,” says Eileen O’Brien, director of IDC’s Enterprise Thin Clients research program.

But that’s not bad news for Citrix. In fact, sales of Microsoft Corp.’s {MSFT} competing product benefit Citrix in several ways. For starters, Citrix receives a royalty payment on each sale of Microsoft’s Windows Terminal Software, which is based on Citrix technology.

Microsoft announced in November that it wouldn’t renew a non-compete agreement it signed with Citrix in 1997. Microsoft is, however, committed to continuing to make royalty payments to Citrix for an additional two and a half years in connection with sales of its own product.

“The company does not expect that the end of [the non-compete agreement] will have a material effect on the core Citrix value proposition, namely the rapid, scaleable, reliable deployment of any application over any network to any end-use device,” Citrix CEO Ed Iacobucci said in a statement.

Although it’s possible some investors may be spooked by confirmation that Microsoft won’t be renewing the non-compete agreement, most analysts say the move isn’t likely to hurt Citrix in the marketplace. That’s because Citrix is often able to sell Microsoft’s customers additional software products that run on top of the Citrix-based Microsoft server product.

“I’ve seen maybe one case in 10 where users buy the Microsoft Windows Terminal Software and then don’t buy additional Citrix products,” Mattson says. “Both companies are definitely going to win.”

The other factor helping Citrix, analysts say, is projections for strong growth in the application service provider market. ASPs are another form of server-based computing, only in this case the software applications are delivered to end-users, usually on a cost-per-seat basis, over the Internet.

Although the ASP market is still in its infancy and projections for it are all over the map, it could generate as much as $21 billion in revenue by 2002, according to a recent estimate by Forrester Research, based in Cambridge, Mass.

“ASPs are the new utilities,” Phoenix says. Citrix sells its software products to the companies that provide application services, helping them make sure each end-user has access to updated versions of the software where and when needed.

“ASP-based revenues will begin to ramp as the ASP market develops. We view Citrix’ early success recruiting ASPs positively but do not expect any near-term revenue from this program,” Peter Ausnit, an equity analyst at Volpe Brown Whelan & Co., based in San Francisco, wrote in a recent research report.

On the other hand, the analysts say Citrix faces very few significant rivals. “There really is no legitimate pure-play competition you can compare to Citrix,” Laidley says.

Mattson agrees. “There are some others, such as Network Computing, which sells a proprietary hardware solution, and Hummingbird Software, and the Santa Cruz Operation,” she says. “But none of them have 100 [original equipment manufacturer] partners, or the deal with Microsoft, or a 7,000-strong reseller channel.”

All three analysts also say Citrix’s fortunes will be boosted by the company’s announced alliance with Cisco Systems Inc. {CSCO}, which is building support for Citrix’s technology into its product line.

Citrix is also augmenting its Windows-based software with similar products aimed at servers that run UNIX software. “That’s a big incremental target market to address,” Laidley adds. “It’s all incremental revenue, which makes it a compelling opportunity.”

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