EMC Better Off Without VMware

I would like to show using the argument reductio ad absurdum that EMC (EMC) does not own any share of VMW (VMW). I use data from Reuters. Projected current period EPS for EMC is .22 at the industry average PE of 24.69 EMC should be selling at 21.72. That's a good bit more than the current price of 18.45 which gives us some margin of error. VMW currently has a market cap of 13.32 per share of EMC. Assuming EMC owns 86% of VMW that would be 11.46 per share of EMC. This would imply that EMC should be trading at near 33.18. But since EMC is currently at 18.45 we can conclude using reductio ad absurdum that EMC must not own any of the VMW shares.

Being an EMC shareholder you might think I would be upset about that but I'm not. Reason: The market will likely sell EMC if it thinks it owns any VMW (because VMW valuation keeps falling.) So luckily EMC doesn't own any VMW, and it's not necessary to sell EMC just because VMW goes down. By the way the obvious might be to short VMW and long EMC, however, I wouldn't try that now with VMW down (yikes) 37% off the highs. EMC is down 27% off the highs so we do see some convergence of valuations. With EMC trading near its core valuation the only way for complete convergence to occur is if VMW tends to zero which it appears to be doing.

Cowen & Co recently started coverage of EMC with a neutral rating, saying sales growth rates should be around 6% instead of 8%. Last quarters growth rate was about 17%. They said playing the price discrepancy was not tradable. As a beginner I have already noticed a strange phenomenon of analysts who tend to say buy just before the price plunges and sell just before it surges. In fact there was one that said buy EMC just before downgrading it at the price peak. I will stick with my EMC. Mr. Market will come around eventually to a fair valuation.

Disclosure: Author has a long position in VMW

Comments

[Stephen211:]

You are an idiot. If you don't know what you are talking about then don't open you mouth and let everyone know how stupid you really are. VMW is the future, and is 5-6 years ahead of its nearest competitor. Its ablitiy to reduce space, electrical and A/C loads required in data rooms means huge cost savings/profits for companies and landlords. And that is just the tip of the iceberg. So my advice to you is that you buy on the dips, it was at $71.00 when you wrote this on 11/26/07 and now 11/29/07 3 day later it is around $90.00. So if like me you bought a 100 shares, you would be up $2000.00.

2007 Nov 29 08:48 PM

[dhejfnydslk...:]

I second that! Do you also write for the NY Times, moron you are no dout!

2008 Jan 02 03:37 PM

[JohnBev:]

You could even take a semi-conservative position in VMWare by buying the stock in a margin account in the high $60's, then writing the $70 October, 2008 Call Option for about $8 per share which means you would only have to invest $27/share out of pocket. ($70/2 - $8 = $27). That is about 30% advance return in 5 months or 6% per month. Complex strategy but it give you both advanced cash flow and downside protection to the low $60's as well if needed. Investigate before you invest but I am a firm believer in the stock and in the strategy.

2008 May 19 05:13 PM