Ashwin Bhagavatula

4 Reasons for VMware Not to Fear Microsoft

David,

Sure, no one is writing off VMWare yet. Most people agree that it will continue to be the leader of the pack in the virtualization space for at least a few years.

That said, I am not sure if it is a good buy at the current price ($80.5 on Jan 4, 2008), even though it has fallen close to 35% from its peak. Its traling 12-month P/E is about a 100, and it is hard to argue that there is a lot of upside left. Not many companies with $30 billion market-caps go for those P/Es (and sustain them over 2-3 years).

Consider this: The most optimistic estimates have VMWare growing earnings at about 70% in FY08, and 50% in FY09. At a stock price of $100, VMWare in Jan-2010 will be commanding a P/E of 50, when presumably the competition would have gotten at least some of their game together.

My gut says that 50 P/E is about the limit that VMWare will hit over the next 2-3 years. Unless, of course, they can continue to grow 70% a few years into the future, which I strongly doubt.