VMware Initiation Today Looks Conservative (VMW, EMC)

VMware Inc. (NYSE: VMW) has been one incredible post-IPO after EMC Corp. (NYSE: EMC) partially spun-off the virtualization leader in August 2007.  It picked up new coverage this morning after William Blair & Company initiated research coverage with a Market Perform rating and an Aggressive Growth company profile.

Analyst Laura Lederman put estimates at $0.80 pro forma EPS for 2007, $1.14 pro forma EPS for 2008, and $1.60 pro forma EPS for 2009. we wanted to see what the P/E ratios would like like, and we’d note that these targets today are the same as consensus for 2007 and slightly under consensus for 2008.  If  Based upon these estimates and a $80.20 close from Thursday, this would be a forward P/E for the virtualization leader of 100 on a trailing 12-months, forward 2008 P/E of 70, and a forward 2009 P/E of 50.

Lederman was quoted as saying,  “We have covered the software space for more than 20 years and rarely have we found a solution with a cost-savings proposition as compelling as virtualization software.  In fact, many software products do not deliver a positive quantifiable return on investment, but VMware’s virtualization software can greatly lower IT costs and increase hardware utilization (from 10%-15% to roughly 80%) by aggregating servers into shared pools of IT capacity. This tremendous savings in hardware and management resources explains why the server virtualization market and, in particular, VMware are growing so quickly.” 

• a673b.bigscoots-temp.com will be making note of VMware on our open email distribution list earlynext week ahead of some important industry and company developments wesee on the horizon besides VMware’s earnings report on January 28.
• Last week Jim Cramer named EMC as one of his picks for value fishingin the technology sector that was either overlooked oversold, and henoted the intrinsic value of sub-$5.00.  We have also noted how famedvalue manager Whitney Tilson was discussing with "THE EMC STUB" with the explanation for the trade.

This note also estimates that the entire marketplace is only 20% penetrated on new servers shipped and that VMware can grow its top line numbers by 43% annually over the next three years.  Lederman also puts a total market opportunity of $10 Billion by 2011.

Earlier this month Lazard Capital initiated coverage with a Buy rating, and the average price target from analysts on Wall Street is still roughly $105.00.

Jon C. Ogg
January 25, 2008