VMware still pricey after fall from grace

By Jim Finkle - analysis

BOSTON (Reuters) - VMware Inc (VMW.N), the hottest tech stock in 2007, has lost 55 percent of its value this year but Wall Street still thinks it's expensive due to slowing growth and mounting competition from Microsoft Corp (MSFT.O).

The Silicon Valley maker of virtualization software, which allows one machine to do the work of 10 or more computers by running multiple "virtual" servers simultaneously, is trading at about 32 times 2009 estimated earnings.

That's nearly three times Microsoft's multiple of 12 and Oracle Corp's (ORCL.O) multiple of 13, according to Reuters Estimates.

While demand is strong for virtualization software as companies can use it to cut hardware budgets and reduce surging electricity bills at data centers, VMware is facing erosion in its dominance of the still-emerging virtualization market.

"We haven't seen something like this in the software market in a long time. It was the next big thing," said Todd Weller, an analyst with Stifel Nicolaus.

But Weller advises his clients to "hold" the stock, saying the current price is still high. "We should have been looking at valuation all along," he said. "Valuation still doesn't look cheap."

Analysts doubt VMware can retain its lofty valuation for long in the wake of a revenue warning and the replacement of its founding chief executive last month, as well as the recent launch of a rival product from Microsoft.

"There's a lot of risk that's still out for the stock," said Sanford Bernstein analyst Charles Di Bona.

The pessimism contrasts with enthusiasm that boosted VMware's share price to a record high of $125.25 on October 31, two months after it was taken public by parent EMC Corp (EMC.N), the data-storage giant. VMware was the most successful technology initial public offering since Google in 2004.

On Thursday, VMware was trading at $39.48 on the New York Stock Exchange.

It may not have much further to fall, said Lazard Capital Markets analyst Joel Fishbein, who reckons the stock should trade in the mid-$30s.

"It does deserve some multiple premium. But does it deserve a hyper-growth multiple? I don't think so because it doesn't have hyper growth," Fishbein said.

TEMPERED EXPECTATIONS

When it made its stock market debut on August 14, 2007, VMware boasted annual sales of about $1 billion and its revenues were growing at an annual rate of about 100 percent.

Investors clamored to buy the stock in a frenzy reminiscent of the Internet bubble, driving it to $51 on its first day of trading -- 76 percent above its offering price of $29.