Here's the discount I promised you, just a little more quickly than expected. VMware
At the current run rates in earnings growth and cash-flow generation, I could live with the $21 billion cap we're looking at today, which would indicate a similar stock price as the first day of trading after the IPO. It took only a slight stumble to shave more than 31% off the market cap overnight.
Ouch! I stubbed my toe!
So what happened? VMware reported 80% sales growth from the year-ago quarter, when it was still a unit of storage specialist EMC
The conference call rolled around at 5 p.m., and half an hour later, the next morning's opening price had pretty much been set. That's after CFO Mark Peek had outlined his guidance for 2008 with a mere 50% revenue boost and a front-loaded sales profile, because the revenue from some deals already signed will be accounted for in the coming months.
That left some analysts wondering if there'd be a slowdown to the 30%-40% range in the later quarters, but management never did clarify the outlook much further, other than explaining that the slowdown is due to the harsher side of economies of scale. It's just much harder to double $2 billion than doubling a single billion.
One Foolish interpretation
Here's how I see it. This was the first time VMware issued any guidance at all, and you haven't forgotten about Vonage
And right now, there's a concerted effort from industry veterans like Citrix Systems
It would be silly to ignore the effects of new competition on that scale. And the competing solutions from Microsoft and the Xen camp have design philosophies different enough from VMware's to drive some purchase decisions. That's why some investors take VMware's cautious guidance at face value or even extrapolate it on the low side.
But I think it will take time for the newcomers to unseat the incumbent market leader from its storied throne, the same way Microsoft's Windows has kept rival operating systems at bay for a couple of decades now and the massive installed base of Oracle databases begets more Oracle deals. And maybe the usurpers never get their way at all. The rich get richer. And nobody said VMware will stop innovating.
It's a deal, it's a steal
Let me reiterate: Here's your buy-in discount. Enjoy it while you can. It took 10 weeks for VMware's stock to go from a 52-week low of $51.50 per share to the high-water mark at $125.25. It can happen again, so don't get caught flat-footed.
Further Foolishness: