When you think of tech stocks, particularly those that tend to have the word “cloud” attached to their name, you probably conjure up a certain image: a young company with a ridiculously high forward P/E, a company that is highly leveraged, and the profitability on which that forward multiple is based is something that you hope will come one of these days, rather than a habit ingrained over time. In some cases that stereotypical image would be true, but there are companies where the reality is very different.
If I told you that there was a tech company that has been around for 20 years, shows rapid growth in a fast-growing field, is expected to grow at around 15 percent a year for the next five years, has nearly the same amount of cash as debt on its books and yet trades at only a couple of points above the average forward P/E for the S&P 500 I think you would be interested. That stock is Citrix (CTXS).
The company is best known for it “GoTo” suite, such as Gotomeeting, a virtual conference room that has emerged as a major competitor to WebEx, which was bought by Cisco (CSCO) in 2007 for $3.2 billion. That is an extremely competitive market, however, and one in which margins are getting squeezed, which is why the activist investor Elliott Management made investigating a spinoff of that division a condition of the deal that staved off a proxy challenge a few months ago.
The results of that internal review and investigation are due the middle of this month, but given the circumstances of its formation it is hard to see how the committee cannot recommend the divestiture. One of the problems that a company has that has been pursuing growth for decades is that the focus can become blurry. Divesting a well-known brand to concentrate on core business makes a lot of sense when that happens. The market seems to see that as a big positive in this case, so buying now before the stock runs up in anticipation of or in reaction to that announcement makes sense.
To some extent that looks to have begun already with an exaggerated reaction to the earnings beat announced a couple of weeks ago. Don’t get me wrong, EPS of $0.87 versus consensus estimates of $0.67 is nothing to be sneezed at, but the positive reaction really got going during the subsequent call when management announced that the results of the investigation would be released this month. There is, however, still plenty of upside left if analysts are to be believed. Credit Suisse, for example, just increased their price target to $100 in the belief that the split is imminent.
Shrinking to grow often strikes me as a strange tactic, but in this case it makes perfect sense. It will free up more cash for Citrix to resume growth in their core software and enterprise businesses, whether that comes organically or through acquisition. GoTo could also benefit in their intensely competitive field from being smaller and more nimble, although that remains to be seen.
In order to buy CTXS at these levels, however, you don’t even have to believe that divestiture of their best known business is a positive move by Citrix. You simply have to believe that a lot of others will feel that way, and that looks likely enough to make this a risk worth taking.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
