A friend asked me this question several days ago and my response was "Yes, but you must be aware of the changing virtualization market relative to the competitive situation that VMware will face in the next one to two years."
I'll explain that statement in greater detail, but first a short primer on what VMware offers as a product (for a more in depth description, see my November, 2007 blog on VMware in the archives.)
VMware provides virtualization software that allows a business to reduce the number of computers it needs in its data center by switching users, on the fly, away from heavily used computers to underused computers. As a result of this load balancing, the data center needs fewer computers. Prior to virtualization software, the number of installed computers in a data center was based on an average usage and all users were assigned to a specific computer. The reduction in the number of computers for the same number of users translates into the installation of fewer computer units. The result: Lower capital expenditures, lower system maintenance costs, and less total electrical energy needed to power and cool each computer.
Now to answer my friend’s question.
VMware is still the leading virtualization software provider with about 90 percent market share. Keep in mind this figure only represents VMware’s share of the number of computers and servers currently virtualized. It is estimated that only 5 to 10 percent of the world’s computers and servers are virtualized, leaving a huge market for future virtualization software. And more data centers are being built every day.
As with all huge market opportunities, competitors are drawn into the market. Last week Microsoft announced that virtualization software will be offered as part of its soon-to-be-introduced Server 2008 software. That announcement alone drove VMware’s stock price down ten percent.
Other software companies are planning to provide virtualization software, including IBM, Hewlett Packard, Oracle, Dell, Red Hat, and others. And we can’t forget the existing competition: Citrix Systems and Virtual Iron.
Vmware has a reputation of providing an excellent product line, but also being the high priced kid on the block. Growing competition will take a toll on profit margins and present a challenge to VMware’s ability to maintain its high rate of revenue and profit growth.
An investor must be prepared for volatility in the company’s stock price and possibly somewhat slower growth rates. For example, 4th quarter 2007 results did not meet analyst’s expectations (really just guesses) and the stock price fell $22.25 or nearly 30 percent. Another example: Dell Computer, a VMware customer, announced the purchase of a small privately held virtualization software company and VMware’s stock price took another large tumble.
At the close of today's stock market activity, VMware’s stock price stood at $55.01 and the 52-week range is $41.41 to $125.25. Granted some of the loss is due to the general malaise of the economy, but much is due to announcements of impending competition, missed growth expectations, and somewhat slower future growth projections by VMware management.
VMware has a PEG (price to earnings to growth ratio) of 1.11 that indicates only a slight over-valuation, and a price to earnings ratio of 37.17, both in line for a growth company in this emerging technology market space. Its debt is a low $450 million that gives a very low debt to equity ratio of 0.31, with revenue growth from $521,000 million to $1.325 billion in three years. Finally, the management team, a combination of EMC and VMware executives, is top notch.
I still think VMware is in a position to maintain good growth and its leadership position in virtualization software, but the journey is not for the faint of heart.
Copyright by Bill Durrenberger, July 2, 2008. All rights reserved.
Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities. Before purchase of any investment, the buyer should consult a financial adviser.
