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Earnings Drops VMWare


If you think VMWare is being really conservative, it's a steal in the mid $50's and lower.


I listened to the VMWare (VMW) call today; here are some of the most relevant points:

  • If you think VMW is being really conservative, it's a steal in the mid $50's and lower. My take is the company was conservative on the call, based on what it knows. What it does not know is how much the Microsoft (MSFT) / Citrix (CTXS) competition will eat into its future growth post 2008. I don't think anyone can predict that result very well, but VMW is trying to build some of this effect into its numbers.

  • Guiding for 50% growth for all of 2008 doesn't seem like a terrible full year guide given the fact that at that point it'll be hitting nearly $2 bln in annual revenue. So the bigger the revenue bar the more challenging those growth targets become and frankly this shouldn't be a big shock.

  • Between $80-100 or higher VMW is priced for perfection much like Google (GOOG) was the first time it approached $500 in 2006. Minor misses will cause large price drops. So now the stock is much cheaper, but not dirt cheap. Under $50 and we are seeing pretty cheap levels.

  • Finally, the stock drop is gut wrenching for the longs but some ratio's are changing rapidly. A forward Price to Sales that was 20 not too long ago is now 10. That is only twice what MSFT's is and the company is growing at a lot more than 2 times MSFT's growth rate.

Forward P/E is likewise dropping a lot today and VMW was not nearly as conservative on the EPS line as the revenue line. This is a theme in tech the last couple quarters with longer term significant implications.

Bottom line, I'm willing to buy VMW somewhere below the current print but like Apple (AAPL), a continued pullback into firming action will be ideal.

A stock that may present better risk reward opportunity and did deliver on its report was CTXS. Good fundies, reasonably cheap, and more MSFT biz in the pipeline.

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Position in AAPL, MSFT

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