VMware On Deck: Approach With Caution

VMware is certain to tap the tech recovery in its first-quarter results, but investors may need to approach with caution.
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PALO ALTO, Calif. (

TheStreet

) -- Virtualization trailblazer

VMware

(VMW) - Get Report

is certain to tap into the tech recovery when it reports its

first-quarter results

after market close, but investors may need to approach with caution.

VMware's shares have risen almost 87% in the last 12 months, and are currently trading around $55.76. At least one analyst, however, feels that the company's valuation leaves little room for error.

"The stock may be ahead of itself," wrote Jefferies & Company analyst Katherine Egbert, in a note released on Monday. "We are going to hold out in hope of a better entry point."

The

software maker

, which is majority-owned by storage giant

EMC

(EMC)

, is nonetheless

well-positioned

for the tech spending rebound, with

virtualization expected to be one of the key trends of 2010

.

Set against this backdrop, Wedbush Morgan analyst Kaushik Roy is more bullish on VMware, rating the company outperform in a note released last week. The analyst also raised his VMware 12-month price target from $60 to $65.

"We believe there is still a lot of skepticism priced into VMware stock, although we believe that the sentiment is starting to improve," he added. "

We suggest that investors buy the stock with a 12-plus month horizon."

Analysts surveyed by Thomson Reuters expect VMware to post revenue of $592.53 million and earn 28 cents a share after market close on Tuesday, a major hike from $470.3 million and 25 cents a share in the same period last year.

VMware, which competes with

Citrix

(CTXS) - Get Report

, holds about 80% of the enterprise virtualization market, according to research from Lazard Capital Markets. Small-to-medium-sized businesses (SMBs) are also turning to the technology, according to Lazard.

"Improving IT budgets are favoring virtualization and many SMBs are now jumping in after years of budgetary constraints," added Jefferies analyst Egbert. "Server virtualization seems to be gaining traction everywhere - there is significant interest in desktop virtualization as well."

Egbert expects VMware to report revenue of $593 million and earnings of 26 cents a share, but says that the company's first-quarter numbers could come in higher.

Virtualization lets users divide physical hardware into multiple "virtual" chunks and has grown in popularity amongst users looking to juggle myriad of operating systems and applications. With companies also struggling with budget pressures, VMware is

pushing virtualization

as a way for firms to reduce the amount of server and storage hardware within their data centers.

IBM's

(IBM) - Get Report

strong

first-quarter results

earlier this week have also placed VMware in the spotlight.

Broadpoint AmTech analyst Brian Marshall, for example, cites VMware, along with

Apple

(AAPL) - Get Report

,

NetApp

(NTAP) - Get Report

and

F5 Networks

(FFIV) - Get Report

, as a better investment alternative to IBM.

"We continue to prefer exposure to other enterprise infrastructure names in our coverage universe that offer superior revenue growth profiles in 2010," he wrote, in a note released on Tuesday. Companies like VMware, added Marshall, are expected to grow their revenue more than 25% year-over-year in calendar year 2010.

Last week VMware also launched a Web site,

www.vmforce.com

, advertising a

mysterious Web cast on April 27

featuring VMware CEO Paul Maritz and

Salesforce.com

(CRM) - Get Report

chief Marc Benioff.

The Web site heralds a "joint product announcement on the future of cloud computing", and there has already been

speculation

about the exact nature of the VMware/Salesforce.com pact.

-- Reported by James Rogers in New York

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