With VMWare, it's all about optimization

Posted Sep 29th 2009 2:30PM by Joseph Lazzaro
Filed under: Stocks to Buy

It goes without saying that I like business models that offer systems to increase efficiency and optimize performance, which is why I'm Reiterating my Buy rating for VMWare (NYSE: VMW), first recommended on June 5, 2009 at a price of $32.59. If you purchased VMW then, you're up about 20%.

VMWare's mission is to improve the efficiency and availability of resources and applications. Examples include running energy systems more efficiently, reducing capital costs, and improving desktop management and control.

Further, although sluggish information technology spending will likely keep VMW's FY2009 revenue growth to about 2-4%, revenue growth in FY2010 should accelerate as the U.S/global recoveries take hold. The First Call FY2009/FY2010 EPS estimates for VMW are 90 cents to $1.05.

Hence, now may be the last time in the current economic cycle to buy VMWare's share and earn an outsized gain. (That assumes Wall Street, in the post-leveraging boom era, won't repeat its 2007 'VMW mania,' when it pushed shares over $100.)

Technically, VMWare's stock chart is slightly overbought, short-term. Hence, more-cautious investors may wish to wait for a pull-back to the $36-38 level. However, keep in mind VMW may not retreat to that level.

Stock Analysis: VMWare Inc. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in VMW now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your VMW position before December 2009. Sell/Stop Loss if you were to buy shares in this company: $14.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: VMW, VMWare