Goldman Sachs Note Hits EMC & VMware (EMC, VMW)

Goldman Sachs has removed EMC Corp. (NYSE:EMC) from its beloved Conviction Buy List this morning, although the firm is maintaining an official "Buy" rating.  The catalyst for the initial call was VMware (NYSE:VMW) and the research note says this has played out and investors are one step further in understanding the underappreciated value of core EMC.  The note does remain positive that EMC should continue to be bought as more balanced growth, multiple product cycles, and shareholder value initiatives after the partial spin-off of VMware are going to likely keep a bid under EMC shares.  Goldman Sachs also said the 5% gain since adding it on July 31 was higher than the 1.2% gain in the S&P 500; and on an annual basis that EMC has risen over 65% versus just over 12% for the S&P 500.

A lot of this sounds close to our "VMware Conundrum" from the end of August.  Our subscriber alert is no longer under embargo since the IPO is basically a month old now, and here is what we sent to paid subscribers as a way of profiting on the expected Downside in EMC stock right after the VMware opening.  This was where we compared it to a myriad of other major spin-offs, and gave some downside targets for a very short-term trade. Special Situation Investing Newsletter trials are available.

EMC shares are now down over 1% at $19.15 in pre-market trading, and this $19.89 to $20.00 top is starting to look like a harder and harder hurdle to overcome.  VMware shares are down almost 3% at $67.90 pre-market. As a reminder, we gave note about what to expect from other companies ahead of VMware’s VMWORLD 2007 CONFERENCE in San Francisco next week.

Investors still need to read all about VIRTUALIZATION as much as they can.  The underlying growth that is going to occur at VMware AND in the virtualization space, regardless of how that individual tracking stock reacts, is going to be large enough that everyone will want a larger and larger piece.  Citrix Systems (NASDAQ:CTXS) acquisition of XenSource is just one of many forrays where companies are going to do what they have to do to get in, although many companies will have to use the continued ‘partnership route’ rather than making acquisitions.

Jon C. Ogg
September 7, 2007

Jon Ogg can be reached at [email protected]; he produces the 24/7 Wall St. SPECIAL SITUATION INVESTING NEWSLETTER and he does not own securities in the companies he covers.