Vmware


Source: VMware.

What: Shares of VMware (NYSE:VMW) were down 20% at 12:30 p.m. Wednesday, following the virtual computing veteran's third-quarter report.

So what: In the third quarter, VMware's sales increased 10% year over year to land at $1.67 billion. Adjusted earnings rose 18% to $1.02 per diluted share. Analysts had been looking for earnings near $1.00 per share on roughly $1.66 billion in top-line revenues, so VMware exceeded both of these consensus targets.

Indeed, the stock first rose 2% on the news as you'd expect, given the strong results. But the joy didn't last, and VMware shares came tumbling down when analysts started issuing their analyses of VMware's results. At least nine Wall Street firms downgraded the stock on Wednesday morning.

Now what: The bearish analyst army cited weak forward guidance numbers and an unclear future. Majority owner EMC (NYSE:EMC) is in the process of going private under the wing of computer systems giant Dell and a consortium of private equity firms. The buyers took great pains to distance their VMware interests from their outright ownership of EMC, and this report did nothing to clarify the big picture.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

Moreover, the market for virtual computing tools and cloud computing platforms is becoming mighty crowded. VMware used to hold this industry in the palm of its hand, but now has to battle essentially every computing business that hopes to stay relevant over the next five years. Maybe that's why Dell is keeping arm's-length distance to its incoming VMware holdings in the first place, preferring to bet on its own tools and products in this important industry makeover.

But again, we don't quite know and that's exactly why VMware shareholders are suffering today. Uncertainty hurts.

Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.