It's been a wild ride for shareholders of Citrix (Nasdaq: CTXS) over the past few months. Those who met the height limit watched their shares climb from $45 in mid-July to close at $70 just over one week ago. Stronger-than-expected revenues in Q2 and a forecast that beat analyst estimates for both Q3 and the full fiscal year sent shares surging at the end of July. That momentum continued into October as acquisition rumours and a sizzling stock market pushed shares to new heights.
Like most roller coasters, that slow steady climb was followed by a free fall, to the tune of 14% -- almost 10 points in one day. What fun!
So what caused the sharp drop? Well for starters, shares of data center operator Equinix (Nasdaq: EQIX) were hammered on Oct. 6 after reducing its forward-looking guidance. This caused market panic in the previously red-hot cloud computer sector and sent prices of those companies streaking downward.
Names such as F5 Networks (Nasdaq: FFIV) and VMware (NYSE: VMW) were down 13% and 9%, respectively, on the day as well. Several days later, after the share price began to stabilize, the other shoe dropped when a Credit Suisse sleuth surmised that Citrix's Q3 and full fiscal year revenue would be lower than expected. Shares tumbled once again on the news.
So what does all this mean for investors? Really, it shouldn't mean anything. Ignore the irrational price swings and focus on what matters, which is to say the company's prospects and fundamentals.
Citrix boasts a robust market share in desktop virtualization, and two prominent analysts expect it to be the market leader in the next three years, surpassing VMware. It also continues to make inroads in server virtualization, long dominated by VMware and Microsoft (Nasdaq: MSFT), thanks to its XenServer product. Add to the mix its SaaS business, which features Citrix's "GoTo" products and now contributes nearly 20% of the company's revenue, and you see a company that is well-positioned for future success.
While a forward P/E of 26 is pricey, I wouldn't expect to purchase a market leader in a high-growth industry on the cheap. With the potential of this company and its strong balance sheet, use the price volatility to your advantage. Even the slightest hiccup of a peer company could send more shockwaves through the cloud companies in the weeks to come, which could be your chance to climb aboard.
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