VMware, Inc. (VMW) and Citrix Systems, Inc. (CTXS) are two leading enterprise software companies that offer digital workspace, security, and professional services worldwide. VMW provides VMware multi-cloud solutions, networking solutions, such as VMware NSX, VMware Service-defined Firewall, and other application modernization solutions. CTXS provides workspaces services like Citrix Virtual Apps and Desktops, Citrix Content Collaboration, and various other networking products.
The increasing penetration of Internet of Things (IoT), smart devices, and cloud-based platforms amid a hybrid working culture has increased the demand for virtual desktop infrastructure (VDI), which is used to execute desktop sessions from a centralized infrastructure.
With a substantial increase in remote working, the need for desktop virtualization solutions to further enhance workplace flexibility has been bolstered. This should bode well for both VMW and CTXS, which are rapidly scaling their business operations to deliver new offerings to the market.
While VMW has returned 8.7% year-to-date, CTXS gained 7.9%. In terms of past year performance, VMW is the clear winner with 30.3% gains versus CTXS’ negative returns. But which of these stocks is a better pick now? Let’s find out.
Last month, VMW unveiled the VMware Cloud, a multi-cloud platform that allows businesses to accelerate application modernization across data center and edge, and to build and deploy cloud solutions. This should allow the company to offer a more integrated experiences to its clients and help drive better business outcomes.
On March 17,VMW appointed Paula Hodgins as senior vice president of worldwide accounts and telco sales, based in Toronto. Her unique skills and expertise should help the company better serve its customers and drive long-term success.
Last month, CTXS entered a multi-year partnership with Major League Baseball (MLB) to leverage MLB’s digital solutions and help evolve its business operations. CTXS will operate as MLB’s Official Workspace and App Delivery Partner to provide innovative tools that can help maximize the productivity of MLB’s employees.
Also last month, the company acquired Wrike, one of the leading providers of SaaS work management solutions, for approximately $2.25 billion. This acquisition should boost CTXS’ cloud-based work platform and help it provide diverse applications to cater to the needs of organizations.
Recent Financial Results
In its fiscal fourth quarter, ended January 29, 2021, VMW’s total revenue increased 7% year-over-year to $3.29 billion, driven by a surge in subscription and SaaS license revenue. Its net income rose 146.4% from its year-ago value to $791 million, while its EPS rose 144.2% year-over-year to $1.88. The company’s net cash provided by operating activities increased 22% from the prior-year quarter to $1.32 billion.
CTXS’ total net revenues increased 5.5% sequentially to $809.66 million in the fourth quarter ended December 31, 2021, driven primarily by an increase in subscription revenues and workspace revenues. However, the company’s net income declined 45.9% year-over-year to $112.09 million, while its earnings per share declined 42.9% from the year-ago value to $0.89 over this period.
Past and Expected Financial Performance
VMW’s revenue and levered free cash flow grew at CAGRs of 12.2% and 28.1%, respectively, over the past three years. In comparison, CTXS’ revenue and levered free cash flow increased at annualized rates of 4.6% and 9.8%, respectively, over this period.
The Street expects VMW’s revenue to increase 8.1% in the current year and 8.6% next year. The company’s EPS is estimated to increase 13.2% in fiscal 2023, and at the rate of 8.8% over the next five years.
CTXS’ revenue is expected to increase 3.8% in 2021 and 8.6% in 2022. A consensus EPS estimate of $7.35 for 2022 represents a 15.6% improvement from the same period last year. Also, over the next five years, CTXS’ EPS is expected to grow at the rate of 10.7%.
VMW’s trailing-12-month revenue is more than three times CTXS’. But CTXS is slightly more profitable, with a gross profit margin of 85.6% versus VMW’s 82.6%.
However, VMW’s levered free cash flow margin of 31.9% compares favorably with CTXS’ 29.3%.
In terms of forward ev/sales, CTXS is currently trading at 5.44x, 6.3% higher than VMW, which is currently trading at 5.12x. Also, its trailing-12-month ev/ebitda of 25.44x is 8.5% higher than VMW’s 23.45x. CTXS is also more expensive in terms of forward price/cash flow (18.44x vs 14.49x).
VMW has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, CTXS has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
In terms of Value Grade, VMW has an A, which is consistent with its lower-than-industry p/e ratio. In comparison, CTXS has a Value Grade of B.
Also, in terms of Quality Grade, CTXS has an A, given its higher-than-industry gross profit margin. VMW has a Quality Grade of B.
Both VMW and CTXS have C Momentum Grades, which is in sync with their price returns year-to-date.
Of the 61 stocks in the C-rated Software – Business industry, VMW is ranked #6 while CTXS is ranked #18.
Beyond what we’ve stated above, our POWR Ratings system also rates both VMW and CTXS for Growth, Stability, and Sentiment. Get the ratings for VMW here. Also, click here to see the additional POWR Ratings for CTXS.
The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Both VMW and CTXS are good long-term investments considering their innovative virtual workspace offerings and growing customer bases. However, VMW appears to be a better buy based on the factors discussed here. We think that its superior financials, higher profitability and relative undervaluation make it a better investment option currently.
Our research shows that the odds of success increase if you bet on stocks with an Overall POWR Rating of Buy or Strong Buy. If you’re looking for other top-rated stocks in the Software – Business industry, click here.
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VMW shares were trading at $151.01 per share on Tuesday afternoon, down $1.44 (-0.94%). Year-to-date, VMW has gained 7.66%, versus a 9.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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