News

VMware Shares Plunge More Than 30 Pct

VMware Inc.'s high-flying stock plunged by more than 30 percent Tuesday as investors reacted to a disappointing fourth-quarter earnings report that raised worries about the business software maker's ability to cope with tougher competition and a slowing U.S. economy.

The jarring descent erased nearly $11 billion in shareholder wealth while shoving VMware's stock down to its lowest levels since the first few days after the Palo Alto-based company electrified Wall Street with its market debut last August.

It marked Silicon Valley's biggest initial public offering since Google Inc. in 2004, triggering a buying spree that more than quadrupled VMware shares from their IPO price of $29.

Founded a decade ago, VMware became a hot commodity by leading a technology trend known as "virtualization" -- a process that helps corporate data center lower their expenses on power and equipment by enabling a single computer to function like multiple machines.

Although VMware's stock had drooped since hitting a high of $125.25 in October, investors remained largely bullish about the company's prospects until Tuesday's sell-off.

Sentiments soured after VMware released its fourth-quarter results late Monday.

Although the company's profit more than doubled to exceed analyst expectations, VMware's revenue of $412 million fell $5 million below the estimates guiding Wall Street. What's more, VMware's forecast of 50 percent revenue growth for 2008 was slightly below the 55 percent to 57 percent range envisioned by several analysts.

The letdown caused VMware shares to plummet $28.13, or 34 percent, to $54.87 Tuesday. VMware's tumble also dragged down its majority owner, EMC Corp., whose shares fell $1.02, or 6 percent, to $15.89.

UBS analyst Heather Bellini predicted VMware's stock will remain out of favor until the company releases its first-quarter results in April. "We think VMware is now likely to be a 'show me' stock," she wrote in a Tuesday note to investors.

Other analysts believe bargain hunters may help lift VMware's shares well before then. The sell-off could "offer a more rational entry point for long-term investors," wrote JP Morgan analyst Adam Holt, who has a $83 price target on the stock.

VMware's fourth-quarter performance and 2008 outlook amplified concerns that the company's growth will decelerate as Microsoft Corp., the world's largest software maker, expands into the virtualization market while several other challengers, including Oracle Corp. and Citrix Systems Inc., also invade the turf.

Analysts also are worried that corporate spending on software like VMware's will taper off as more executives brace for a possible recession.

As severe as Tuesday's downturn was, VMware's stock could face another wave of selling next month with the lifting of restrictions that prevented company employees and other insiders from selling their holdings during the first six months after the IPO.

Many VMware insiders may be tempted to sell beginning Feb. 11 because they got their stock at prices that would still produce big gains even after Tuesday's carnage.

Featured

comments powered by Disqus

Office 365 Watch

Sign up for our newsletter.

I agree to this site's Privacy Policy.