This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

VMware's Success Is its Own Worst Enemy

As a result, the company has since turned its attention to growing sales to fight off the likes of IBM (IBM - Get Report), Hewlett-Packard (HPQ - Get Report) and Red Hat (RHT). The company is willing to do this now even at the expense of near-term profits.

But will the strategy pay off? The company is willing to spend to grow, but it also needs to answer from where the growth is going to come.

VMware is the undisputed market leader in virtualization -- this much is a given. But how about the other markets in which it competes, which include desktop virtualization, servers as well as system administration tools. Investors are left to speculate how well the company can grow market share in these areas -- particularly as rivals are projecting tougher quarters ahead.

Investors should also not assume these rivals are simply going to roll over and concede the market for VMware.

Bottom Line

The company's strong cash position and solid balance sheet coupled with an excellent management team makes VMware one of the toughest names to bet against. Its biggest challenge continues to be too-high expectations. The only question is to what extent its growth will justify the stock price. At some point valuation will start to matter.

From that standpoint, I wonder how much revenue deterioration investors will tolerate before its P/E drops a bit from nose-bleed levels. Even more concerning is that its success and dominance has placed a target on its back from rivals who want nothing more than to put it out of business.

I like the company, but I want to see a reversal of the growth trend before the stock would make sense right here.

At the time of publication, the author held no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
HPQ $33.26 0.00%
IBM $169.78 0.00%
MSFT $47.87 0.00%
VMW $88.23 0.00%
AAPL $130.28 0.00%


DOW 18,080.14 +21.45 0.12%
S&P 500 2,117.69 +4.76 0.23%
NASDAQ 5,092.0850 +36.0220 0.71%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs