VMW - 104.91
not springing up w/mkt
expectations being tempered a bit
Will be hard to please WS in this market
I'm in enough for now
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VMware Outpaces Google Since IPO on Program Prospects (Update2)
By Melita Marie Garza
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Oct. 24 (Bloomberg) -- VMware Inc.'s shares have tripled since the software maker's initial public offering two months ago. Google Inc.'s stock rose 75 percent at the same point.
VMware, whose programs save money by letting companies run more software on one computer, sells for more than 160 times earnings. Google, owner of the world's most popular search engine, has never traded at more than 100 times earnings.
Today, investors in Palo Alto, California-based VMware will get to make another comparison with Google, and may decide whether the run-up in the shares is justified. VMware reports earnings for the first time as a publicly owned company.
Anything less than a Google-style trouncing of estimates may be a disappointment, said Paul Meeks, director of research for L.R. Burtschy & Co., a family-owned fund in Charleston, South Carolina, that manages $600 million. ``Boy, this better be Google-like,'' said Meeks, who doesn't own VMware because he thinks the shares are too pricey.
Investors have driven up the stock on speculation that VMware, whose $1.1 billion IPO was the biggest for a technology company since Google's $1.92 billion offering in 2004, will continue to dominate the market for so-called virtualization programs, which let server computers run several operating systems at the same time. One machine, for example, may be able to run Microsoft Corp.'s Windows and the Linux operating system, allowing it to do the work of many computers.
Total sales of virtualization software may more than triple to $3.5 billion by 2011, according to research firm IDC in Framingham, Massachusetts. VMware is the biggest company in the business by far, with 84 percent of the 1,000 largest U.S. companies as customers.
Profit Advances
VMware's net income rose 30 percent last year to $85.9 million, while sales gained 82 percent to $703.9 million, according to regulatory filings. Google's profit more than doubled in 2006 to $3.08 billion, and sales climbed 73 percent to $10.6 billion.
VMware, founded by Chief Executive Officer Diane Greene in 1998 with her husband, Mendel Rosenblum, fell 11 cents to $106.04 at 11:57 a.m. in New York Stock Exchange trading.
The 52-year-old Greene, who has a bachelor's degree in mechanical engineering and master's degrees in naval architecture and computer science, ranked as the 22nd most powerful woman in business this year, according to Fortune magazine. Rosenblum, VMware's chief scientist, also works as a computer-science professor at Stanford University.
EMC Corp., the top maker of data-storage computers, owns 86 percent of VMware, which it acquired in 2004. EMC used the IPO to provide stock options to pay for Silicon Valley talent, construction of VMware's headquarters and product development.
Microsoft Fight
VMware faces growing competition from Microsoft and smaller rivals such as XenSource Inc., also located in Palo Alto, and Lowell, Massachusetts-based Virtual Iron Software Inc.
Microsoft tried to buy VMware in 2002, and instead wound up acquiring rival Connectix Corp. after VMware turned down the offer. Starting next year, Redmond, Washington-based Microsoft plans to give away a competing virtualization program, Viridian, with its server operating system.
``VMware had the market to themselves for six years,'' said Thomas Bittman, an analyst with Stamford, Connecticut-based researcher Gartner Inc. ``I give VMware maybe two more good years of high-growth revenue. It really depends on Microsoft and the reliability of their product.''
`Playing Catch-Up'
Tony Ursillo, an analyst at Loomis, Sayles & Co. in Boston, expects VMware to keep its edge longer.
``VMware has a lot of available resources and some pretty tight partner relationships,'' said Ursillo, whose firm manages $120 billion and owns the stock. ``Its competitors, including Microsoft, will be playing catch-up for several years, not just one or two years.''
VMware also faces a threat from makers of open-source software, which is given away by programmers. XenSource and Virtual Iron both offer open-source virtualization programs. Citrix Systems Inc., a maker of networking software, has agreed to acquire XenSource.
``I'm not counting Microsoft out,'' said Kimberly Caughey, senior equity analyst with Fort Pitt Capital Group in Pittsburgh, which manages $1.2 billion.
Fort Pitt owns EMC shares. VMware is too risky to own, she said. ``VMware is probably getting a little bit ahead of itself,'' she said.
VMware's growth prospects are higher than Google's because it went public as a younger company, Caughey said. VMware is expanding from a smaller revenue base, while Google was ``just spinning off cash,'' she said.
EMC Stock
Given VMware's rise, EMC's lower stock price puzzles some analysts. EMC's shares fell 25 cents, or 1.1 percent, to $23.11. The company also reports earnings this week.
Even if VMware's shares are only worth half their current price, EMC is an attractive stock, said L.R. Burtschy's Meeks. While his fund owns neither stock, he's trying to persuade the family to buy EMC.
``Fifteen dollars of EMC value is VMware, yet EMC is trading at $22.88'' as of last week, Meeks said. ``That is saying that the rest of EMC is worth all of $7.''
To contact the reporter on this story: Melita Marie Garza in New York at mgarza4@bloomberg.net |
