Citrix Systems (NASDAQ:CTXS) has lost out on much of the bull market over the last three years as EMC Corporation's (NYSE:EMC) VMWare (NYSE:VMW) asset has risen to become the most dominant name in the virtualization market. While this fact has forced a bearish outlook for Citrix, its second-quarter report helped to confirm something that might change its investment outlook.

What's virtualization?
VMWare and Citrix are leaders in the business of virtualization, or the process of running various operating systems and applications at one central location. This business has grown immensely in servers, PCs, and most recently in mobile, with the former being VMWare's core business.

With that said, VMWare has fully penetrated the server virtualization business, as it remains the bulk of the company's business and is now struggling to find growth. However, VMWare still managed to churn out a 17.7% growth rate during the second quarter, behind a 50% increase in PC virtualization and 16% growth in services revenue, which made up over 40% of the company's $1.46 billion in revenue.

Meanwhile, as VMWare intrudes on Citrix's core PC and mobile virtualization businesses, Citrix has struggled to find growth in this market. Specifically, its revenue in virtualization increased just 4% to $396 million in the second quarter, implying that VMWare continues to steal market share from Citrix.

It could get worse for Citrix?
With that said, VMWare is its own public company, but EMC remains its parent, owning an 80% stake and holding great leverage over many of its operating decisions. EMC and VMWare work closely together in developing new software products aimed at slowing the growth of competing cloud products.

Therefore, with EMC being an enormous external and internal storage company, the partnership with VMWare benefits it to a greater degree. It also means that much of VMWare's energy is spent trying to figure out how to solve EMC's problem of maintaining its place atop the storage market.

Nonetheless, news hit last week that activist investment fund Elliot Management is pushing hard for EMC to divest its holdings in VMWare, which has gained quite a bit of traction on Wall Street. If so, or if EMC's stake is divested largely, this might benefit VMWare in its attempt to focus on new virtualization products, which consequently could be bad for Citrix.

In retrospect, it might actually occur, because with VMWare valued at $41.5 billion, EMC's stake is worth a pretty penny, which would be used on new storage products.

Citrix has quietly been preparing itself
Albeit, when you look at the underlying state of virtualization, it might seem foolish to invest in Citrix, as this has been the case for the better part of two years. However, the company's second quarter reveals an alternative theory, one where virtualization is no longer as meaningful for the company.

Specifically, virtualization accounts for approximately 50% of total revenue, and Citrix has gained from the rise of new segments. For example, Citrix has built a cloud business as well, with products like GoToMeeting, and this segment grew 12% in the quarter to create $161 million in revenue. Also, Citrix's networking segment grew 9% to $179 million.

Therefore, while networking and cloud-related revenue is much smaller than virtualization, it combined accounts for nearly 45% of revenue and has a much more favorable growth rate.

Foolish Thoughts
The bottom line is that Citrix has been out of investment contention for quite some time, but as its growth drivers have emerged significant to its overall business, Citrix now looks relatively attractive at 18 times forward earnings. Furthermore, VMWare's growth has been fickle in recent quarters, and with there being so much uncertainty regarding EMC, 25 times forward earnings has begun to appear a little pricey. Therefore, Citrix might now be a stock to put on your radar for a long-term investment, especially if it sees any additional short-term weakness, as its last quarter confirmed that it's on the right track.

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of EMC and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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