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Is VMware’s Stock Too Hot?

Quoting DealBook

The initial public offering VMware, the year’s best so far, was a bright spot amid gloomy market conditions. But MarketWatch notes that some analysts think that the virtualization software maker’s stock, which has already soared more than 150 percent, may be burning too hot, too fast.

The Silicon Valley software maker raised about $1.1 billion in its I.P.O. last week and saw its shares jump 76 percent in their first day of trading. Defying a weak market, the shares closed at $51, or $22 higher than the offering price of $29.

Since then the stock has gained even more ground; VMware shares closed at nearly $67 yesterday, more than 90 times estimated earnings for the next four quarters. MarketWatch notes that Microsoft, which VMware lists as its most notable competitor, trades at only 16 to 17 times estimated earnings for the next year.

And while some market observers admit they love VMware’s business, they are hard pressed to justify its current valuation, which is now one of the highest in the software sector.

On Monday, when VMware shares were trading at nearly double their I.P.O. price, Walter Pritchard of Cowen & Company wrote in a report that “there are very few sets of assumptions that allow the stock to meaningfully outperform the current valuation.”

And Mr. Pritchard was not the only analyst troubled by the meteoric rise of VMware.

“We believe current levels…as fair given enormous growth prospects, heavy operating expense investment, and partially handicapped by long-term competitive uncertainty,” Daniel Renouard of Baird, wrote in a report issued Tuesday. “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.”

Others, however, saw an even brighter future for VMware.

Katherine Egbert of Jefferies, who raised her price target on the shares to $74 from $42 on Wednesday, said in a report that VMware “has the brightest prospects of any software company in the last 10 years.”

Still, she sounded a note of caution telling clients that “[w]e believe investors would do well to await actual quarterly financial information before building in additional revenue, margin, or EPS growth.”

Read the original, here.

Published Thursday, August 23, 2007 10:19 PM by David Marshall
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