VMware Selloff Might Be Overdone

One analyst suggests the stock's plunge may bring a good buying opportunity.
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SAN FRANCISCO - VMware's (VMW) - Get Report plummet Tuesday may have brought investors a buying opportunity.

The stock was recently off $14.65, or 27.5%, to $38.54, as more than 15 million shares changed hands - more than 7 times the average daily volume. Its previous all-time low of $41.41 was set in March.

But the stock plunge following the company's

lower revenue outlook

for 2008 could be an overreaction, as the company has likely set itself up to meet or exceed its new forecast, which was short on specifics.

And one analyst is suggesting that the revised outlook could just be a hiccup in a new order-entry system that may be delaying the booking of orders.

Simultaneously announcing a CEO change Tuesday, VMware said 2008 revenue will come up just shy of the 50% growth it had targeted. But the company left second-quarter revenue projections unchanged.

Slower growth could indicate a steep drop is expected later in the year, given that the company has already posted a 69% revenue increase for the first fiscal quarter.

The lowering of annual guidance came as a surprise "and is indicative of a challenging IT environment," JPMorgan analyst John DiFucci wrote in a note Tuesday. VMware is an investment banking client of the firm.

However, one analyst suggests the warning could be the result of a new software system implementation that is delaying orders. "I think they had a switchover in an internal system that caused partners not to be able to do business with them," Cowen's Walter Pritchard said in an interview. The problem reportedly has hampered sales teams' efforts at delivering price quotes and entering orders, he added. VMware is not a client of the firm.

If the problems turn out to be a systems issue, "we'd view the shares more attractively at current levels than if it is related to fundamental market issues," Pritchard wrote in a note.

Pritchard also noted that

EMC

(EMC)

, the majority owner of VMware, has been looking for an excuse to oust its co-founder and CEO Diane Greene, who left the company on Tuesday.

The reduction in revenue expectations gave the board the rationale it needed to name Paul Maritz, a new EMC executive, as her replacement.

Maritz is a former

Microsoft

(MSFT) - Get Report

executive who founded a company with technology that works closely with virtualization software. EMC acquired Pi Corp. in February.

VMware's ascent peaked in the last quarter of 2007, with revenue growth approaching 90%. The stock dropped 34% in January, after the company said 2008 revenue would grow at a mere 50%.

Microsoft is expected to erode VMware's growth trajectory through its dominance as the business software provider of choice in many corporations. Although Microsoft is only just beginning to build the advanced virtualization tools offered by VMware, businesses that consider themselves "Microsoft shops" may find it easier -- and cheaper -- to stick with a software framework that is familiar, intuitive to their installed software, and comes integrated into their servers.

Microsoft's database, email and server software have gained big market share - a strike against VMware in sales situations.

"While Microsoft may not have a tangible impact in 2008, we expect ... Microsoft will take significant share from VMW" as Microsoft's virtualization technology matures, Pritchard wrote.

Maritz will be expected to take quick action to right VMware's course. One strategy he will likely have to consider is the double-edged sword of lowering prices to make VMware products more competitive.

While lower prices on its sophisticated software tools would further cut into revenue, it would also solidify its position among its large and loyal customer base as they weigh the cost of remaining clients.

Many VMware adopters have implemented the products on a limited basis. VMware must win them over again as they expand virtualization across their entire production environments and out to their desktops.