DJ VMare Shares Are Reaching Pricey Levels
By Dan Gallagher
After only a week on the public market, VMware Inc. (VMW) has already seen its
share price soar more than 150%, giving the young software maker a higher market
cap than many of its more-seasoned peers.
This surge has also drawn the concern of some analysts, who admit they love
VMware's business but are hard pressed to justify its current valuation, which
is now one of the highest in the software sector.
Walter Pritchard of Cowen Co. wrote in a report Monday that "there are very
few sets of assumptions that allow the stock to meaningfully outperform the
current valuation."
Shares of VMware were trading in the $55-$57 range that day, nearly double the
stock's IPO price from last Tuesday. Since then, the shares have gained even
more ground; VMware jumped 12% Wednesday morning to nearly $74 before cooling
later in the day.
Recently, VMware was trading just under the $70, up about 6% from the previous
close.
At that price, VMware is trading at more than 90 times estimated earnings for
the next four quarters. That's one of the highest valuations in the entire
software category, which carries an average price-to-earnings ratio of 31.4,
according to data from Thomson Financial.
VMware is also trading at a sharp premium to software giant Microsoft Corp.
(MSFT), which it designates in its IPO filing as its most notable competitor.
Microsoft trades at only 16 to 17 times estimated earnings for the next year.
VMware scored the best-performing IPO of the year last week when its share
price jumped more than 75% on its first day of trading. The company makes
"virtualization" software designed to help corporate networks run more
efficiently. It is majority owned by EMC Corp. (EMC) and has minority
investments from Intel Corp. (INTC) and Cisco Systems Inc. (CSCO).
Pritchard, who started coverage of the stock when it debuted, added a neutral
rating to the shares Monday. He said he was "incredibly bullish" on the
company's business prospects but could not recommend purchase of the shares at a
"valuation that appears stretched."
A similar view was sounded by Daniel Renouard of Baird, who started coverage of
the stock with a neutral rating on Tuesday.
"We believe current levels...as fair given enormous growth prospects, heavy
operating expense investment, and partially handicapped by long-term competitive
uncertainty," wrote Renouard, who set a $60 price target on the shares.
"Fundamentals are likely to be strong for the foreseeable future and we would
look for meaningful upside to existing expectations or a pullback in the stock
to get more aggressive."
Katherine Egbert of Jefferies Co. took a more bullish stance, boosting her
price target on the shares to $74 from $42 on Wednesday while maintaining her
buy rating. |
