The company certainly has a strong product line as they offer revolutionary technology alternatives which help companies save costs related to their computing needs. Specifically, VMW is known for its cloud computing solutions. While I’m certainly no technology guru, I can definitely understand the appeal of a solution that allows businesses to run multiple operating systems on one server, or link a server farm together to harness the full power of the equipment instead of segregating each server to a particular task.
For the quarter, VMW realized revenue of $470 million which is only 7% above the revenue from the first quarter 2008. Management noted that the macro environment was extremely challenging and stated that revenue for the second quarter would likely be flat to down compared to last year. Customers are expected to continue to be tight fisted when it comes to technology spending. While these customers are likely to choose VMW over a competitor due to the cost savings aspect, the competitive advantage will likely not make up for the industry weakness.
While the company will continue to be profitable, and holds plenty of cash on its balance sheet to survive the economic cycle, many investors are likely to dump shares. The stock is well off its high of $72.08, but still likely to fall. In fact Barclays issued a report this morning with a price target in the low to mid 20’s. Unfortunately, when a growth stock company no longer shows strong growth prospects, the multiple can contract quite quickly.
According to Wachovia research, 2009 is likely to be a year of uncertainty for VMware. The report cites a deceleration in top line growth along with margin compression. This is a fancy way of saying the company will get less in sales, and even those sales will generate smaller profits. Compound smaller profits with a lower multiple on the stock and you have a very disappointed shareholder base. This is why I think it makes sense to be out of the stock and potentially short even at this point (in the $26 range).
VMware will continue to work on providing new solutions for customers. They recently announced strategic collaborations with Cisco Systems, Inc. (CSCO) as well as Intel Corporation (INTC). On top of that, the company is pushing new features which cater specifically to small businesses offering top notch service for a smaller initial investment. The management will almost certainly keep the company profitable, but at a lower level than investors had been hoping for.
FD: Author does not have a position in VMW
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