In the following video, Eric Bleeker discusses the massive VMware (NYSE:VMW) sell-off that also dragged down shares of parent company EMC (NYSE:EMC). As Eric notes, VMware was priced near 60 times earnings before its latest earnings. Often, when companies are priced at such high levels, they can experience outsized sell-offs for relatively slight earnings misses. In VMware's case, the midpoint of its sales guidance for 2013 was $130 million below expectations. The company is expected to post more than $5.2 billion in total sales this year.
Eric notes that the largest problem isn't the total size of that sales miss, but the fact that the company has seen growth of its licensing business decline from 31% in 2011 to 8% to 11% this year. Since licensing drives the company's profitable services revenues, any slowdown signals slowing growth ahead. However, Eric further cautions that at less than 20 times its trailing free cash flow, today's VMware panic could lead to profits down the road for long-term investors. To see his full thoughts, watch the video.