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TheStreet Open House

High-Flying Stock Gets Analysts Arguing Over 'Buy' and 'Sell'

BOSTON ( TheStreet Ratings) -- VMware (VMW) posted strong financial results in the third quarter after the stock-market close Monday, yet said 2012 might be challenging, given global economic concerns.

That's led to dissension among sell-side analysts.

Goldman Sachs (GS) analyst Heather Bellini, who had a "buy" rating and a $120 target on VMware, added the stock to her firm's so-called Conviction Buy List of favored companies. Bellini notes in her report: "We believe this remains a name that has one of the best growth profiles in enterprise tech for 2012 and will remain a share of wallet gainer despite a challenging macro environment."

Kash Rangan at Bank of America (BAC) maintains his "buy" rating and a $104 price target. He downplays management's acknowledgment of global economic risks, noting that "VMW is not seeing project cancellations/deal push outs but is trying to be conservative."

On the other hand, Jefferies (JEF) analyst Ross MacMillan cut his rating on the stock to "hold" from "buy," reducing his target to $90 from $100. "Overall, we see risk of less upside to estimates than previously assumed and given valuation, that's not enough for us."

Needham & Company analyst Scott Zeller maintains a "buy" on VMware, yet he cut his price target from $120 to $105. "Q3 results were strong, but guidance for 4Q was only marginally above consensus revenue, and was a letdown from the last conference call."

So whom do you believe? There are worries about what management had to say regarding 2012, yet this is a company positioned to take advantage of continued momentum in the virtualization space.

As I mentioned in my previous article, the stock is priced at a premium (trading at nearly 40 times 2012 estimates), so at these levels, you are paying dearly for what appears to be only 20% growth going forward.

I tend to err on the side of caution with any stock facing increasing competition (especially now with the likes of free offerings from Microsoft and Red Hat) with evidence of growth that has potentially reached a peak. While I am impressed with VMware's recent performance, I would wait for a pullback before building any position in the stock.

Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser.

Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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