VWWare (VMW) lost about a third of its value on a disappointing quarterly report. The stock is now down to $56, near a 52-week low and off a period high of better than $125.

The pricing of the company’s IPO last year was $29, and that is probably closer to the real value of the company. That would move the firm’s market cap from its current $22 billion to just over $13 billion.

Fourth quarter revenue at VMW was $412 million, up 80% over the same period a year ago. GAAP operating income was $76 million, a 19% operating margin. At this point VMWare trades about 14x its revenue run rate.

In the last quarter, Microsoft had revenue of $16.37 billion. Operating income was $6.48 billion. That is an operating margin of almost 40%. In its core software businesses, Microsoft has operating margins higher than 60%.

Wall St. would argue that Microsoft is not growing as fast as VMWare. That is true, but VMWare is facing competition in it virtualization software business. It is the lead, which should command some premium.But, Microsoft actually has only modest competition in its operating software operations. Their business in that arena is also probably less likely to be hurt by recession or a major competitive threat.

Microsoft’s multiple of revenue is about a little over 5x. Should the difference in revenue multiples be so great between the two firms. Almost certainly not. Could VMW’s growth rate give it a 7x or 8x figure? Probably. That gives the stock a value of about $30.

Douglas A. McIntyre

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