VMWare (VMW): The Stock The Market Underestimated

VMWare’s (VMW) went from an IPO price of under $50 a year and a half ago to $125. That happened in three months. The market then discovered that the virtualization software company’s revenues were not going to double every year and the shares dropped to $20.

What Wall St. missed is that VMWare builds what is likley to be the single most important software available to cut IT costs over the next decade.

Yesterday, VMW reported a quarter in which sales rose 32% to $472 million. The company beat consensus EPS numbers. The stock then moved up 22% from where it had been trading, near its 52-week low.

Analysts should have seen the rise of VMW coming all along. Virtualization software allows one server to do what it took several to do until recently. The products will allow large companies to eliminate hundreds of servers and the related hardware costs. As many computer functions run on the server-side of applications instead of using PC CPU, virtualiztion will only become more important.

VMWare is sitting at the toll booth of the future of computing. The stock should never have been beaten down as much as it was.

Douglas A. McIntyre