Pray tell me aright,
Through the darkness of night,
Can good St. Nicholas come?
-- "Model Dialogues," William M. Clark
The stock of virtualization specialist VMware (NYSE: VMW) went through the roof last week, gaining 15.6% between the opening bell on Thursday and the closing buzzer on Friday. That rally still left share prices about 35% below the lower $80s, where the stock looked comfortable at the end of 2007, but it's still an impressive increase.
So, pray tell, what happened? Why this unexpected gift, after St. Nick and the Easter Bunny?
VMware itself didn't release any big news item or product update on Thursday, nor did competitors like Microsoft (Nasdaq: MSFT) or Citrix Systems (Nasdaq: CTXS) make any major virtual moves. It wasn't even an analyst upgrade -- in fact, Lazard Capitaldowngraded the stock on Thursday and Stifel Nicolaus started coverage on Friday with a meek "hold" rating.
A positive Forbes article on the virtual server market as a whole might have helped some, but it didn't show up until halfway through the rocket ride. It also didn't affect Citrix or Microsoft at all. We're running out of usual suspects here.
But I do have one more theory to put to the test. VMware was stumbling around near an all-time low price when the rush started, some 24% below where it closed on its IPO day in August 2007. Short sellers like to unwind their positions at low, low prices, and about 5% of the shares outstanding were on the short side of the Street at last count.
So we've missed out on a very tasty buy-in point, and if the shorts had their heads screwed on straight, those prices might not come back anytime soon -- or at all. VMware might not be cheap by traditional metrics like trailing P/E ratios, but it makes up for it in hypergrowth and rates a very reasonable 1.0 on the PEG scale right now.
The virtualization market is still in its infancy. According to the Forbes report, industry analysts expect about 30% of enterprise data centers to be virtualized in 2010. Only 5% of IT the infrastructure today sits on a virtual platform, so the untapped growth opportunity looks massive.
Efforts from giants like IBM (NYSE: IBM), Sun Microsystems (Nasdaq: JAVA), and even Oracle (Nasdaq: ORCL) to get a foot in the door mostly seem to have expanded the sector and raised public awareness of the virtual phenomenon. The price might still be right if you're looking for a promising growth stock. And if VMware doesn't quite float your boat, our Motley Fool Rule Breakers team has a few other ideas, available for free with a 30-day trial.
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