Virtualization was supposed to be the next big thing in enterprise software. Virtualization allows one computer do the job of multiple computers by sharing the resources of a single machine .The software makes it possible to run multiple operating systems and multiple applications on the same computer at the same time.

Nifty. The champion of the new software is EMC (EMC) spin-off VMWare (VMW). The company had a market cap of $50 billion last October. That is more than half of the current market cap of Oracle (ORCL). But, Oracle’s revenue last quarter was over $5.3 billion. In the last reported quarter, VMW’s revenue was $412 million, and was growing at 80%.

VMWare’s market value has dropped to $18 billion, and it happened, at least in market terms, overnight.

The twenty-four analysts who cover the company still project 50% revenue growth this fiscal year.

VMWare has run into some obvious problems. Microsoft (MSFT) has begun to move aggressively into the market. That could certainly lead to price pressure. Citrix Systems (CTXS) also has some competing products.

Most of those things would not cause a stock to lose 60% of its value.

The problems with virtualization is that it is not the perfect child it has been made out to be with a 180 IQ, excellent manners, and an athletic build. The software, at least according to some sources, is fairy immature and does not do all of the things that the marketing material says its does.

As Enterprise Networks pointed out "there is a danger of this type of solution being seen as "all things to all men," and implemented widely without proper consideration of a number of challenges that can arise. IT managers risk neglecting important tenets and disciplines if a few basics are put in second place in a rush to virtualize.".

A comment by a Gartner analyst was even more damning. Quoted by FierceCIO he said "Wait out the problems with virtualization before fully committing to it. Those problems, which include licensing, support, emerging technologies, cost and the lack of enough good virtualization vendors, are big hurdles."

The most common complaints about virtualization software is that it lacks adequate monitoring and management tools. If so, that would explain some of the sell-off in VMW.

The customers knew there were problems before the shareholders did.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.