EMC Shares Regaining Ground; VMware Falling Below Debut Levels

1/30/08Follow @wroush

After plunging nearly 10 percent on news from a Monday night quarterly-earnings call that 2008 revenue growth for virtualization subsidiary VMware would be slightly less than expected, shares of EMC (NYSE: EMC) seem to be rebounding today, reaching $16.30 by noontime, only a dime or two below the pre-call levels.

Apparently investors feel there’s little need to punish EMC for VMware’s readjusted earnings expectations. Instead, they’re punishing VMware (NYSE: VMW) directly: shares in the subsidiary are still trading around $56.00 today, down about 30 percent from Monday’s levels. For the first time, the stock has dipped below the price at which it debuted in last August’s much-vaunted IPO, erasing the last of the gains recorded as shares climbed to a peak of about $124 last Halloween.

On the surface, it’s hard to see why such a small change in earnings projections—VMware said it would bring in $2.00 billion this year, as opposed to the $2.08 billion Wall Street analysts had been expecting—provoked such a dramatic drop in VMware’s share price (and in the process lopped billions of dollars off of VMware’s total valuation). But the sudden deflation may simply reflect the final settling-in of perceptions that, as we observed back in November, VMware is competing in a market where virtualization software is quickly becoming commoditized and the biggest customers have already anted up. Any result short of a surprising surge in fourth-quarter revenues was probably guaranteed to reinforce investors’ looming concern that, as UBS analyst Heather Bellini put it in a research note, the “low hanging fruit may have been picked.”

EMC itself performed better than expected in the fourth quarter of 2007, bringing in $526 million, 35 percent above revenues for the same quarter of 2006—which may be helping to mitigate the impact of investors’ shifting perceptions of VMware.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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