After a modest 11% growth since March 23, Citrix Systems stock (NASDAQ: CTXS) looks fully valued based on its historic Price to Sales (P/S) multiples. Citrix Systems, a cloud-based enterprise software provider, has seen its stock rally from $122 to $135 off the recent bottom compared to the S&P which moved around 50%. The stock is lagging the overall markets by a margin, as investors are cautious about the stock sell-off by company insiders over the recent months. Notably, the technology stocks have also seen some negative movement since September 2nd due to a stint of profit-taking after a strong run – CTXS’s stock is down 9% in the past one month. Despite this, the stock is still up 22% from levels seen at the end of 2019.
Citrix Systems’ stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year.
Some of the rise over the last 2 years could be attributed to roughly 7% growth seen in Citrix Systems’ revenues from FY 2017 to FY 2019. Its net income increased from -$20.8 million in FY 2017 to $681.8 million in FY 2019, mainly due to the income tax benefit received in 2019 related to the Swiss tax reform.
While the company has seen modest revenue growth over FY 2017-19, its P/S multiple has remained almost constant. We believe the stock is unlikely to see a significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove 57% Change in Citrix Systems Stock Between FY 2017 And Now? has the underlying numbers.
Citrix Systems’ P/S multiple hovered around 5x in FY 2017 and FY 2019. While the company’s P/S is around 6x now, there is some downside risk when the current P/S is compared to levels seen in the past years – P/S of just below 5x at the end of FY 2019 and FY 2018.
So what’s the likely trigger and timing for the downside?
Citrix Systems is an enterprise software company that creates and sells solutions that enable its users to remotely access their work computers and networks on a variety of devices. During the lockdown, many businesses moved to the work-from-home model, which benefited Citrix to some extent due to its leadership position in the remote working solutions space. However, the ongoing Covid-19 crisis and the economic uncertainty have caused losses for businesses across the world, resulting in lower IT spending. This is likely to impact the revenue growth rate of the company as sales-cycles are expected to take more time than usual and contract renewal rates will likely be lower than the year-ago period. While the Q2 2020 results saw some growth on a year-on-year basis, we believe that Q3 results will see some decrease in growth rate, negatively impacting Citrix Systems’ stock price in the short term.
However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.
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