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VMware Soars to New High

A bevy of bullish analyst calls gives shares a boost.
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SAN FRANCISCO -- Shares of virtualization darling VMware (VMW) broke through to a new high Monday after bullish coverage initiations from seven of the company's IPO underwriters.

The stock was recently up $5.86, or 7.4%, to $85.17.

Parent company



, which retains ownership of 86% of VMware,

also got a boost; its stock was recently up nearly 7% to $20.31.

Given VMWare's ever-rising price target, analysts may be feeling pressured to meet loftier views of the stock's potential.

While UBS' 12-month target looks bullish at $92, it's tame next to Citigoup's $100 target price. Bank of America valued the stock at $75 and gave it one of four neutral or hold ratings Monday. Three analysts ranked the stock a buy. VMware is an investment-banking client of all the firms.

Previous coverage by analysts whose firms did not participate in the IPO give the stock a more moderate $66 median price target, according to Thomson Financial.

In explaining her $92 target, UBS analyst Heather Bellini compared VMware to



"as a sanity check," because both companies are the leaders in fast-growth markets. "We believe VMware could post similar upside to estimates as Google did in the first year after going public," she wrote. Google beat earnings estimates by about 30% on average during its first year.

Citigroup analyst Brent Thill noted his $100 price target gives credit to a strong growth rate and assumes a price-to-earnings-to-growth (PEG) ratio of 2.3 -- assuming a three-year earnings growth rate of 39% and that the stock trades at 89 times earnings. Thill gave the stock a high risk rating.

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BofA analyst Kirk Materne projects that VMware will continue to dominate as the leading virtualization software supplier. He gives it a PEG ratio of 1.8, assuming a 50% growth rate and a

price-to-earnings ratio of 88.

Competition will emerge, Materne wrote, but VMware will defend its turf, according to Materne. While



Viridian, due out in the second half of 2008, and



XenSource virtualization software will create new competition, Materne believes VMware's technology will stay ahead of the game.

JPMorgan's Adam Holt, who did not issue a price target, noted that the stock is already priced at a premium to comparable technology stocks. Given the very limited float, VMware will likely remain at a substantial premium, he wrote. Nearly 38 million shares are being traded.

Holt also believes there is more growth upside to virtualization than suggested by some analysts. Virtualization could reach 20% of the server market within the next three years, from an estimated 4% today. Holt says the company has an 18- to 24-month technology lead over competitors and such a large stable of developers with advanced degrees that the company is unlikely to be superseded anytime soon.

Palo Alto, Calif.-based VMware has more than 20,000 customers, including all of the Fortune 100 and 84% of the


1000. But at many companies, the software is still restricted to testing in labs, rather than broad deployment across corporate server environments.

In addition to selling the basic software giving companies the means to better use their existing equipment, research firm IDC estimates that virtualization providers can unlock another $30 billion by 2011 by selling software into "adjacent" markets, such as desktop virtualization, disaster recovery, security, server clustering and storage management.

VMware already sells software to meet these needs, reducing its reliance on sales of its basic "hypervisor" product to 20% of the company's revenue, according to Holt.