By Christopher French - February 19, 2012 | Tickers: CTXS, VMW | Comments

Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Citrix Systems (NASDAQ: CTXS) believes that it can see the future, and it’s in the clouds. Or at least the virtual space that we are all being urged to put our trust in, for it is here that Citrix is making a play. It believes that the concept of the ‘personal cloud’ for businesses, where each employee has a cluster of applications, data, and friends, will see it be a market leader in a multi-billion market by 2015.

In its efforts to gain a foothold in this space, Citrix has acquired ShareFile for an undisclosed sum. The company has 2 million business users from 14,000 corporate customers and counts Pepsi, MetLife, and T-Mobile amongst them. It also bought AppDNA, an application management and compatibility specialist amongst other smaller acquisitions. It also has a new partnership with Cisco, aimed at the large-scale desktop virtualization market.

Fourth quarter earnings were better than expected, with revenues up 17% from the same period last time round and earnings per share of $0.58, beating market estimates of $0.50. It gave guidance for 2012 of $2.72 per share on the bottom line, though it did pull back its first quarter earnings forecast to around $0.50 per share against market expectations of $0.56. It was this reticence on earnings growth that caused the shares to slide on the day of the announcement, falling around 4% to $65. This reticence was caused by management conceding that acquisitions made are unlikely to add to the bottom line until the second half of the year. The company is concentrating on building its capacity for increased offerings to potential customers.

Since then, in a little more than two weeks, shares have moved up to $75, bouyed by a positive technology market and increasing customer favor toward the cloud solution. Shares of Citrix competitor VMware (NYSE: VMW) are trading at $99 on a price to earnings ratio of 59. Citrix shares trade on a price to earnings ratio of 40, with a forward price to earnings ratio of 24 (VMware’s forward price to earnings ratio is 32.5).

Operating margins at both companies stand around 19%, though VMware has a far bigger bagful of cash -- $4.51 billion against Citrix’s $740 million. Citrix has no debt, while VMware has $450 million of debt.

While VMware’s business model may be a little more advanced than Citrix’s, and evidenced by the market’s higher rating, both face incredible challenges. Citrix’s ability to acquire more capacity without moving into debt is now limited. However, perhaps the biggest challenge will be to live up to market expectations in the face of increasing competition in the marketplace. While there are new, small companies looking to make it big in the cloud on almost a daily basis, the competition from Microsoft (and its Sharepoint ad Office 365 offering) and Google (and its Google Docs) should not be underestimated.

Citrix shares have reached what was a strong level of resistance in November. With analysts’ median 12-month price target at $80.33 in sight, and management softening of earnings expectations, I think the recent run-up in share price could be part of a last hoorah before the price falls away again. For me, there is more downside risk than upside potential.

DividendKings

Christopher French

Christopher French is a member of The Motley Fool Blog Network.

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Is Citrix Finding Success in the Cloud?