INTERNET &
TECHNOLOGY
Comcast Moves Into Faster Lane With High-End Broadband Service
HP Next Up In Internet Data Storage
Chipmaker TI Has Challenges In Mobile Field
Big eBay Bids To Catch Little Craigslist
E-mail | Print | License | Republish | Post | IBD news direct to your inbox with IBD® Alerts Plus
A New Year For Ex-Highflier VMware
BY BRIAN WOMACK
INVESTOR'S BUSINESS DAILY
Posted 4/8/2008
VMware (VMW) hasn't lost all its investor fans, but they're harder to find.
The pioneer and leading provider of fast-emerging virtualization software earlier this month saw its shares slide below 51, where the stock closed on its first day of trading last August. The stock has fallen 37% in 2008.
Wall Street sentiment has been slipping of late, with two analysts downgrading the stock and two others lowering their price targets, though those moves partly were offset by two upgrades.
Following disappointing fourth-quarter results, investors are growing increasingly edgy about VMware as it nears its next quarterly report, scheduled for April 22. Concerns are growing that competition from Microsoft, (MSFT) Citrix Systems (CTXS) and Oracle, (ORCL) plus the lagging economy, could slow VMware's eye-popping growth.
"Investors are a little bit skittish about what the management is going to say (in the next earnings report)," said James Gilman, an analyst at Cross Research. "(But) it's all relative. The overall market has been sputtering, too."
Already A Giant
VMware remains one of the world's most valued software companies, with a market capitalization near $20 billion. That puts it on par with the likes of retailer Best Buy (BBY) and above such big-name companies as Starbucks (SBUX) and General Motors. (GM)
The stock remains well above its IPO price of $29 a share.
VMware dominates in virtualization software, which creates multiple "virtual" servers within one physical server. With virtualization, companies can buy fewer servers, more easily manage networks and lower their costs.
Demand for the products pushed VMware's sales more than 80% higher in 2006 and 2007.
The company wasn't expected to do that again in 2008, but when VMware gave its first guidance to Wall Street in January, executives said they expected sales of $1.99 billion, up about 50%. That lagged analyst expectations of $2.08 billion. The company missed analyst revenue views for the fourth quarter, though it beat on earnings.
"The guidance was disappointing," Gilman said.
Brent Thill, an analyst at Citi Investment Research, says VMware is still a great company but that investors had just been too optimistic about its prospects in 2008.
He says the company has been weighed down by a dour market. The Nasdaq is down 11% this year.
Investors are gravitating toward safe, dependable stocks, not highfliers, says Thill, who rates VMware's stock a buy.
"Expectations just got out of control," Thill said. "We definitely went from a market last year where growth (stocks) dominated, to one with a slowing macro environment. The overall investment thesis has become more defensive."
Thill says VMware probably gave conservative guidance, but he adds that its toughest quarter for topping expectations might well be the first.
Another concern for the stock, according to Gilman, is that more insiders — who usually aren't allowed to sell stock for the first six months or so after an IPO — will be able to sell stock over the next year. More supply of VMware shares isn't what the stock needs, Gilman says.
Microsoft Getting Close
In the meantime, rivals are getting stronger.
Citrix Systems, which bought virtualization firm XenSource last year, recently announced a partnership with Hewlett-Packard (HPQ) to sell virtualization pre-installed on HP servers.
Still, the bigger threat might be Microsoft. As soon as midsummer, Microsoft is expected to release its first full-fledged virtualization product.
Shebly Seyrafi, an analyst at Caris & Co. who rates VMware's stock average, on March 24 lowered the company's price target from 60 to 50. In a research note, he cited Microsoft's progress with its virtualization and Citrix's deal with HP.
Thomas Bittman, an analyst at research firm Gartner, forecasts that VMware's market share will fall from at least 90% in 2007 to 86% in 2008.
"There is more to this market than just VMware, and competition is coming," Bittman said. "There is a lot of market that is untouched."
He says VMware should give away its core product to get customers on board, then sell them software tools that help manage the virtualized servers.
Gilman believes Microsoft will be willing to cut prices to grab customers. He says Microsoft will make an especially compelling offer for smaller business customers.
But Thill says VMware has a great package for midsize companies. He says some smaller companies that already use mostly Microsoft software might well choose the company's virtualization offering, but he also says VMware has spent a decade developing, refining and maturing its products.
He notes that companies such as Salesforce.com (CRM) and Adobe Systems (ADBE) have been able to stave off threats from Microsoft and remain leaders in their fields. VMware can do the same.
"They have proven themselves," Thill said. "The proof is in the customers." |
