VMware Falls Below IPO Starting Point

SAN FRANCISCO - Vmware's(VMW Quote) stock continued to bleed Wednesday, sinking below its initial IPO trading price for the first time ever.

Shares were down $5.47, or 17.1%, to $26.51, bringing VMware's two-day drop to 21%. The stock is trading at 22 times expected 2009 earnings, vs. its P/E ratio last month of 31.

VMware went public in August 2007 at $29, but within months catapulted to trade above $120. The stock has subsequently faded, as results began to disappoint investors, who started to fear increasing competition to the company's market share.

On Wednesday, Jefferies analyst Katherine Egbert cut her one-year price target to $30 from $40. The consensus target estimate of analysts stands at $36, according to Thomson Reuters.

Egbert noted the company appears to have a "way to go" in achieving its third-quarter revenue target of $462 million to $468 million. Jefferies makes a market in shares of VMware competitor Microsoft(MSFT Quote), but does not make a market in VMware.

Analysts expect the company to post a third-quarter top line of $465.2 million.

VMware outlined new product directions for 2009 this week, but economic and competitive fears are overshadowing the company's plans. Its market dominance and healthy projection for 42% to 45% revenue growth for 2008 are considered at risk as woes in the financial sector may lead to a contraction in worldwide IT spending.

Egbert estimates 10% to 15% of VMware's revenue is derived from financial services.

Forrester Research estimates that global software spending growth will drop to 11% for 2008, from 14% last year. But those estimates may predate the most recent turmoil in the financial markets, brought on by the failure of Lehman Brothers(LEH Quote) and the sale of Merrill Lynch(MER Quote) this week.