1 Second-Fiddle Tech Stock Ready to Be a Virtuoso

Famous conductor Leonard Bernstein reportedly said that the hardest instrument to play is second fiddle because everyone wants to play first chair. My guess is that the best second fiddlers are the ones who most want to be first chair.

What applies in making music also applies in making money. Not every company can be first in its market, but the ones to watch are those that aren't in first but are trying the hardest to get there. Let's take a look at a technology company playing second fiddle now but working hard to make it to the top.

Three-part harmony
Citrix Systems
(Nasdaq: CTXS  ) is a contender in three high-growth areas: virtualization, online collaboration, and cloud computing. While the company is first chair in the desktop virtualization market, it isn't the clear leader in server virtualization or the other areas -- at least not yet.

Gartner includes three organizations as leaders in its 2012 Magic Quadrant for server virtualization -- VMWare (Nasdaq: VMW  ) , Microsoft (Nasdaq: MSFT  ) , and Citrix. VMWare commands the highest market share in virtualization, but Citrix and Microsoft are catching up, according to Network Computing.

A recent survey confirms that Citrix is making gains in customer opinion. The 2012 Channel Champions survey showed that VMWare narrowly beat out Citrix in the server and virtualization category. These results are surely encouraging for the company as it tries to leap past VMWare.

Things are looking good on the online collaboration front also, although not as promising for taking the lead spot. Cisco (Nasdaq: CSCO  ) has that position, with its WebEx product claiming 58% market share in 2011. Citrix is in a distant second place with 13%. Citrix isn't standing still, though. Revenues for its online collaboration and remote access/support products were up 21% in Q1 compared to the same quarter last year.

The cloud computing market holds perhaps the greatest potential and the most difficult path for Citrix. As for potential, Gartner estimates that over five times more digital content will be stored in the cloud by 2016 compared to 2011. The path will likely be challenging for Citrix, though, because of the large number of competitors in this cloud market.

Gartner's latest Magic Quadrant public cloud infrastructure as a service (IaaS) showed a jumble of 20 companies. Amazon (Nasdaq: AMZN  ) took the top position as the strongest leader and visionary. Citrix didn't show up at all.

What is Citrix's strategy to compete in such a crowded market? First, the company acquired Cloud.com in 2011. Citrix next integrated Cloud.com's CloudStack private cloud platform into its product line. Then came a radical move. Citrix turned CloudStack over to the Apache Software Foundation as open source.

Some analysts think Citrix acted shrewdly. If more customers adopt CloudStack, Citrix stands to potentially benefit from increased sales of its XenServer server virtualization platform. The company would also make money providing support for CloudStack. Citrix should be a big winner if CloudStack gains traction.

Dissonant notes
While Citrix has big opportunities in these three growth areas, the stock isn't necessarily cheap. Take a look at how Citrix compares with key competitors.

Company

Trailing P/E

Forward P/E

PEG

Enterprise Value/EBITDA

Citrix 42.67 24.60 1.67 22.97
Amazon 185.21 86.93 5.48 51.48
Cisco 12.29 8.74 1.09 4.57
Microsoft 11.00 9.75 1.26 6.71
VMWare 47.86 27.70 1.38 31.69

Source: Yahoo! Finance.

Citrix isn't trading at the astronomical valuation level of Amazon, but the stock appears to be significantly higher valued than Cisco and Microsoft. VMWare more closely matches Citrix in valuation.

Citrix's trailing P/E falls on the upper end of the stock's five-year range of 19 to 49, while the forward P/E is closer to the low end of the range. However, the forward P/E implies annual EPS growth of more than 35%. I think this growth estimate goes beyond what Citrix is likely to see, considering that the company has only attained this growth rate once in the past five years.

Concert ticket
I look for Citrix to be a budding virtuoso in multiple growth areas. Even if it doesn't reach the No. 1 spot in every area, the company seems poised for continued success.

However, concert tickets for the greatest performers can sometimes be overpriced. Similarly, Citrix appears to be priced too high right now. Another summer downturn like we had the past two years could present a buying opportunity, though. Citrix in the $60 to $65 range could be a ticket worth buying.

While Citrix certainly has its fingers in several of the biggest growth areas in tech, its markets aren't the only games in town. In fact, there's one massive opportunity unfolding today that Citrix isn't involved in. Take a look at The Motley Fool's new free report, "The Next Trillion Dollar Revolution." To get your copy of this free report, just click here.

Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of Cisco Systems, Microsoft, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com, Microsoft, and VMware. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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