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Earnings Drops VMWare

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

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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.

Position in AAPL, MSFT

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