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), Hewlett-Packard (HPQ) 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.

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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.

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