Virtualization Rivals May Vex VMware

Investors are getting carried away with VMware(VMW Quote).

Shares of the storage virtualization company closed trading Wednesday at $57.85, up another 13% for the day and nearly double its IPO price of $29 fetched last Thursday.

But despite the certain heady growth ahead for the virtualization market and VMware's high-quality, feature-rich product, a market cap of $22 billion is a bit optimistic.

Even a more modest valuation of $15 billion would require the company to keep its massive market share near current levels as the space grows, and as it continues to charge customers relatively astronomical prices for its products.

But beyond the imminent competition from Microsoft(MSFT Quote), the market is teeming with hot start-ups determined to compete on price. It's unlikely that VMware can continue to keep the market to itself while charging such high prices.

Bullish on the stock at the time of last week's partial spinoff by storage giant EMC(EMC Quote), Bernstein Research analyst Toni Sacconaghi estimated that the shares were worth between $34 and $39.50 each, which would value the float at between $13 billion and $15 billion.

That valuation is based on VMware increasing its earnings per share by more than two-and-a-half times to $1.76 in 2010. This year, the company should earn 67 cents a share, according to Thomson Financial.