No that long ago, VMware (NYSE: VMW) was a high-flier tech company. But since reaching $124 in late December, the company's shares have been on the descent. In today's trading, the stock price is off 11.51% to $33.60.
True, based on its Q2 report, things look pretty rosy. Revenues surged 54% to $456.1 million and net income was up 53% to $52.3million, or $0.13 per share.
Then again, VMware is a leader in so-called virtualization technologies, which help bolster data centers and complex corporate networks. Unfortunately, it looks like the deteriorating macroeconomic environment is taking a toll. For example, VMware is seeing slippage in close rates for software licenses.
Something else that's jarring: two weeks ago, VMware's CEO and co-founder, Diane Greene, left the company.
EMC Corp.'s (NYSE: EMC) once-high flying VMware, Inc. (NYSE: VMW) finally found the wherewithal to replace its CEO, Diane Greene. The company replaced her yesterday with former Microsoft executive Paul Maritz. Microsoft is shaping up to be VMware's main competitor as computing environments in many business circles would like to jump on the virtualized bandwagon instead of dedicated hardware platforms for specific purposes.
Although VMWare was a hot IPO back in August of last year -- touching the $125 mark in October -- the stock started a downward slump right before Christmas and has been on a see-saw ever since. VMW shares are sitting less than four points from all-time lows this morning after a 25% drop Wednesday. In fact, this month has seen a 39% share price slump on the back of an overall 52% drop in 2008. Those numbers are sure to get any CEO in hot water. Although Greene reportedly constantly clashed with EMC management (EMC owns a large majority of VMware), the final axe swing surely came on the back of the share price depression currently underway. EMC management, in other words, bowed to the needs of the market in canning Greene.
Greene has been referenced as inadequate to lead a company into the world of a $2 billion annual business (its projection for 2008). I don't buy it -- she has a Master's Degree in Computer Science from UCal Berkeley along with another advanced degree. At heart, she's a brilliant computer nerd. As the head of a leading software virtualization company, her credentials and investment in VMware sound like a perfect fit. At the end of the day, though, financial performance in the eyes of a public share price is the driving force in executive retainer decisions. Greene helped co-found VMware and is heavily invested in it, but the market is not investing in her any longer. Let's hope Maritz can do a better job.
Oil was down another $5.00 per barrel today, yet that failed to cause a major rally despite a $9.00 in just two days. Today's end of day rally was led by financials after an FDIC conference which led to excitement about the sector. If you were looking for any brightness in home sales, May's pending home sales came in at -4.7% year over year. We also saw wholesale inventories in May rise by +0.8%. Perhaps more interesting is that the MAY Consumer Credit rose more than expected to $7.8 Billion. Below are the unofficial closing bell levels for today: DJIA 11,384.21 (+152.25) S&P500 1,273.68 (+21.37) NASDAQ 2,294.42 (+51.10) 10YR T-Note 3.88% (-0.05%) 52-WEEK LOWS TOP 10 ANALYST CALLS
Hank Paulson's speech gave some support after his speech didn't ring of the "Death of GSE's" and shares of Fannie Mae (NYSE: FNM) were up over 10% at $17.40 in today's final minutes.
MOST NOTEWORTHY: Today's noteworthy initiations were Monolithic Power, Emergency Medical Services, Amsurg and EnergySolutions.
Monolithic Power (NASDAQ: MPWR) was initiated with a Buy at Am Tech, which predicted that Monolithic Power will have significant design win momentum that should result in stronger than expected revenue growth. The firm thinks the company will be able to grow 20% in its 2008, thanks to its new products and competitive prices.
Emergency Medical Services (NYSE: EMS) was initiated with a Sell, target $15 at Citigroup. Citigroup believes EMS's earnings contribution from insurance releases and prior period adjustments is not sustainable.
AMSurg (NASDAQ: AMSG) was initiated with a Buy, target $32 at Citigroup. Citigroup said it is positive on AMSurg given its history of FCF per share growth, low out of network exposure, little debt risk, and acquisition pipeline.
EnergySolutions (NYSE: ES) was initiated with a Market Perform, target $26 at FBRC. Friedman Billings expects EnergySolutions to trade at a slight discount to peers given its leverage balance sheet and perceived slower growth.
OTHER INITIATION:
VMWare (NYSE: VMW) initiated with a Market Weight at Thomas Weisel, based on valuation. Thomas Weisel believes VMWare is uniquely positioned to benefit from trends toward centralized IT resources, on-demand delivery and greater efficiency.
Citrix Systems (NASDAQ: CTXS) was initiated with an Overweight, target $37 at Thomas Weisel. Thomas Weisel believes Citrix Systems is uniquely positioned to benefit from trends toward centralized IT resources and on-demand delivery given its product line that targets the data center.
MOST NOTEWORTHY: Smith International, Cerner and Coach were today's noteworthy upgrades:
JP Morgan upgraded Smith International (NYSE: SII) to Overweight from Neutral citing better risk/reward vs. group, and upside to estimates from Latin America drilling and its deepwater rig fleet. Note that Oppenheimer downgraded shares of SII based on valuation.
Jefferies believes Cerner Corp. (NASDAQ: CERN) in-line results and solid domestic bookings could alleviate the pressure on shares. Shares were raised to Buy from Hold.
Shares of Coach Inc. (NYSE: COH) were raised to Buy from Hold at Citigroup, citing sales stabilization and compelling valuation.
OTHER UPGRADES:
Medco Health (NYSE: MHS) was upgraded at Oppenheimer to Outperform from Perform.
ThinkPanmure raised VMware Inc. (NYSE: VMW) to Buy from Accumulate.
SunTrust Banks (NYSE: STI) was upgraded to Market Perform from Underperform at Keefe Bruyette.
On its face, it looks like the tech M&A market is holding up nicely -- despite the credit crunch and slowing economy. For example, in Q1, tech M&A came to $92 billion, which was down from last year's $100 billion (this is according to the 451 Group).
Good, huh? Well, as usual, statistics can be deceiving. Keep in mind that Microsoft's (NASDAQ: MSFT) $45 billion bid for Yahoo! (NASDAQ: YHOO) was a huge factor (interestingly enough, there are signs that the deal may not go through).
In fact, there was a 50% reduction in deals in excess of $1 billion (only 11). For the most part, larger transactions need debt financing -- which is in short supply nowadays. After all, last year we saw a rush by private equity firms into the tech sector.
According to the 451 Group, it also looks like strategic buyers are getting skittish. Simply put, they are concerned about the macroeconomy. And something else: with lower stock prices -- with companies like Microsoft, Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) and VMware (NYSE: VMW) -- it is more dilutive to do deals.
"VMware is a market leader in software virtualization. Companies typically do not use the full computing power of their servers, and when not in use, that server sits idle.
"Virtualization technology allows IT managers to use that underutilized capacity -- running software across the organization's entire base of servers. Thus, virtualization is a key cost-cutting technology.
"VMware has a short interest ratio of 11.7 and a freely traded float of just 50 million shares. If all those shorts try to cover, the stock looks likely to be in short supply. Meanwhile, trading at 36 times 2009 earnings estimates with a long-term growth rate of 45%, VMW doesn't look overpriced.
"Under Armour (NYSE: UA) makes clothing (along with sports equipment) targeting the athletic and outdoor-oriented market. Specifically, the company makes clothes designed to wick moisture away from the skin and keep the wearer at a comfortable temperature, regardless of weather conditions.
"Meanwhile, the stock has seen strong earnings growth despite the slowdown in consumer spending -- earnings surged 42% in the fourth quarter. And management recently announced its looking for revenues to reach $765-775 million in 2008, representing around a 27% increase over 2007 levels.
"With a forward P/E of 23 and a long-term growth rate of 25%, UA looks inexpensive. With a float of less than 32 million shares and a short interest ratio approaching 12, Under Armour looks like a prime short-squeeze candidate."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
The server virtualization business is the next big thing in corporate computing as it allows servers to run several programs where before they might have been able to run only one. That allows enterprises to save on hardware costs. The leader in the industry has been VMware (NYSE: VMW), which had its IPO less than a year ago. The company has had red-hot growth rates and is very profitable.
As is true in all things involving software, though, Microsoft (NASDAQ: MSFT) wants a piece of the action [subscription required]. It is about to launch software to compete with VMware. The name of the new product line is Hyper-V.
As VMware gets ready for the challenge from Microsoft, it is forming alliances with IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ) and Dell (NASDAQ: DELL) to ship its software pre-installed on some of their servers.
According to The Wall Street Journal, "VMware customers aren't ready to say they will switch, but seem to welcome the competition." Microsoft's new product is bad for VMware no matter how Wall Street wants to slice it. After hitting $125.25 post-IPO, VMW share are now below $59. The company has operating margins of 20% and is still growing at a rapid pace.
Microsoft knows how to enter a market: come in with a good product, tie it to Windows and price the new software to squeeze competitor margins. VMware is in for the fight of its life.
"This is still a psychologically damaged market; take for example, what happened with VMware (NYSE: VMW) after its latest earnings announcement," notes Toby Smith in ChangeWave Investing.
"VMware recently reported that its fourth-quarter net income more than doubled on an 80% increase in revenue. Despite these excellent results, after-hours selling has plunged the shares lower by 25% to around $61.
"The culprit appears to be analysts' forecasts for an 82% increase in revenues. The buzz on the Street is that this miss signals stiffer competition in the virtualization space from Microsoft (NASDAQ: MSFT) and Oracle (NASDAQ: ORCL).
"However, during the conference call VMW management said customers have tried some competitors' products and told them that they see no reason to switch.
"This sell-off is similar to what recently happened to Apple (NASDAQ: AAPL) -- blowout performance followed by a hatchet job on the shares. As with Apple, we see this price drop in VMW as a great opportunity to establish a low cost-basis in the stock.
EMC Corporation (NYSE: EMC) this morning reported a fourth-quarter profit of 24 cents a share on revenue of $3.83 billion, beating analysts' estimates of 22 cents a share on revenue of $3.66 billion. However, EMC shares are plummeting this morning after VMware Inc. (NYSE: VMW), which is 86%-owned by EMC, reported fourth-quarter revenue of $412.5 million. Because analysts had expected VMW to report revenue of $417.4 million, investors may be thinking that VMW's breakneck growth will slow down for the first time since the company's August IPO. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on EMC.
After hitting a one-year low of $12.74 in March, the stock hit a one-year high of $25.47 in October. This morning, EMC opened at $15.42. So far today the stock has hit a low of $15.30 and a high of $15.75. As of 11:35, EMC is trading at $15.63, down $1.28 (-7.6%). The chart for EMC looks bearish and steady, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bearish hedged play on this stock, I would consider a March bear-call credit spread above the $18 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in 2 months as long as EMC is below $18 at March expiration. EMC would have to rise by more than 14% before we would start to lose money.
Last year, VMware Inc (NYSE: VMW) was a darling for growth investors. But as of this year, things are not so stellar. The stock fell 26% in after-hours trading because of the jarring news from its quarterly report.
Revenues increased 80% to $412 million, which was below the Street's consensus forecasts of $417 million. Net income came to $78 million, or $0.19 per share
VMware -- which is 85% owned by EMC Corp. (NYSE: EMC) -- develops so-called virtualization software. Basically, the technology helps to reduce the costs of servers and other information technology (IT) resources.
To push growth, VMware has been aggressive in global markets, such as Eastern Europe, Japan, and China. There are also some marquee agreements, such as with SAP (NYSE: SAP).
While it looks like the momentum will continue for the first half of 2008, things are not so hopeful for the remainder of the year. In fact, the company projects a revenue growth rate of 50% for the full-year.
True, a slowdown is inevitable as it gets difficult for a billion-dollar company to keep churning large-size growth rates.
Although, the competitive environment is intensifying. Companies like Citrix (NASDAQ: CTXS), Microsoft (NASDAQ: MSFT), Oracle (NASDAQ: ORCL) and Virtual Iron are getting serious about virtualization. And no doubt, this is likely to put pressure on pricing.
VMware, Inc. (NYSE: VMW) shares opened higher this morning as the company has announced that it has agreed to buy privately-held software company Thinstall. Terms of the deal were not disclosed, but VMW hopes the acquisition will allow the company to expand its desktop virtualization capabilities. Last week, VMW reported that it bought the services-related assets of Foedus, a privately held information technology services provider. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on VMW.
After spinning off from EMC Corp (NYSE: EMC) at $48.00 in August, the stock rose steadily to set its high of $125.25 in October. VMW opened this morning at $81.53. So far today the stock has hit a low of $81.14 and a high of $84.40. As of 10:50, VMW is now trading in the red at $81.44, down 80 cents (1.0%). The chart for VMW looks bullish and steady.
For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $60 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.5% return in just one month as long as VMW is above $60 at February expiration. VMWare would have to fall by more than 28% before we would start to lose money.
VMW hasn't been below $60 since just after its spin-off in late summer and has shown support around $71.50 recently. This trade could be risky if the technology sector is weak through earnings season, but even if that happens, this position could be protected by the support the stock might find between $70 and $80, where it has bounced twice int eh past two months.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in VMW or EMC.
But the incumbents are not sitting around. Take EMC (NYSE: EMC). This week, the company launched a new offering, called CLARiiON AX4. It scales to 60 terabytes and works with two key standards (iSCSI or Fibre Channel SAN). Of course, there is integration with Microsoft (NASDAQ: MSFT), Oracle (NASDAQ: ORCL), and SAP (NYSE: SAP) product lines.
EMC is also targeting the small- and medium-sized business market segment, which certainly needs stronger solutions.
But there's something else that's important; CLARiiON AX4 is seamless with VMware (NYSE: VMW). "Just as VMware is consolidating data centers, we are also seeing consolidation of storage," said Barry Ader, who is the senior director of Storage Product Marketing at EMC. "We are also seeing lots of growth with VMware with the SMB market."
And with EMC owning about 86% of VMware – which has a market cap of $30.7 billion – there should be a nice boost for the storage business. And, more importantly, a way to deal with the fierce competition in the space.
No that long ago, VMware (NYSE: VMW) was a high-flier tech company. But since reaching $124 in late December, the company's shares have been on the descent. In today's trading, the stock price is off 11.51% to $33.60. 
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Here are some highlights from this past week's 
On its face, it looks like the tech M&A market is holding up nicely -- despite the credit crunch and slowing economy. For example, in Q1, tech M&A came to $92 billion, which was down from last year's $100 billion (this is according to the 
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The enterprise storage market has been fairly hot lately. After all, corporate America is drowning in data.
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John McCain, losing ground, goes for broke tonight
If nothing else, gasoline prices are falling!
Closing Bell: Dow slump puts bulls on suicide watch; BAC, MS, F, FSLR all down, AMD up
