VMware Jumps As 10 Firms Launch Coverage

Includes: DVMT, VMW
by: Eric Savitz

VMware (NYSE:VMW) shares are soaring even further into the stratosphere as the wide variety of firms associated with the virtaulization software company’s phenomenally successful IPO launched research coverage. VMware, which came public August 14 at $29, and which has since marched steadily higher, Monday hit new highs, yet again.

One interesting aspect to Monday’s flurry of coverage is that while they all express admiration for the company, not all of the analysts actually advise buying the stock, due to the huge appreciation in the shares to date. Meanwhile, analysts at Citigroup and Bear Stearns raised their ratings on EMC (EMC) Monday, based largely on the ever-increasing mathematical value of the company’s 86% stake in VMware.

Since the VMware IPO, EMC shares are up a paltry 6%, and all of that gain occurred Monday. In that same period, value of its stake in VMW has increased $18 billion, and is now worth $27.55 billion, or about 65% of the company’s $42 billion market cap. VMware shares, meanwhile, have gained nearly 190% since the IPO.

Here’s a rundown on Monday’s VMware reports from the Street, followed by some details on the two EMC upgrades.


  • Deutsche Bank’s Todd Raker starts the stock with a Hold rating and $80 price target. Raker says the stock has “one of the best fundamental growth stories,” but that he is “struggling with current valuation.” Raker says he “would continue to own a position in the stock but would look for a better opportunity to buy a new position.”
  • Lehman’s Israel Hernandez starts the stock with an Equal Weight rating and $80 target. He says his valuation “is based entirely on valuation,” and says he would buy the stock on any meaningful pullback. Writes Hernandez: “We encourage investors to be patient and look for pullbacks to establish or add to positions.”
  • Wachovia’s Philip Rueppel started the stock with a Market Performing rating, and finds a fair value range of $70-$75. “While we are extremely bullish on the company’s fundamental business prospects, at about 19x our 2008 revenue [estimate], we believe the shares are fairly valued.”
  • Merrill Lynch’s Kash Rangan launched coverage with a Neutral rating. He notes that the stock trades at 92x estimated 2008 EPS. “While justified given VMware’s enviable market position and potential, the valuation does not suggest enough upside to warrant a Buy based on current estimates,” he writes.
  • Bank of America’s Kirk Materne launched with a Neutral rating at $75 target. He says the stock is “fairly valued with much of the potential upside in the model baked in.”
  • Credit Suisse’s Jason Maynard starts the stock at a Neutral rating, with an $85 target. "While we are bullish about the company’s prospects, we think the stock’s current price is only modestly underestimating the tremendous potential of the business at this time."
  • Citibank’s Brent Thill starts the stock with a Buy rating and $100 price target. He says that the company has “a clear runway over at least the next two years,” with 85% market share and the lack of a meaningful competitor.
  • UBS’s Heather Bellini began coverage with a Buy rating and $92 target. “As VMware enjoys an 86% market share [yeah, I know, Thill says 85%. Whatever.] in an industry that is only 6%-10% penetrated, it appears very well positioned to benefit from the sector’s growth opportunities…we do not expect VMware to face any meaningful competition over the next 1-2 years.”
  • J.P. Morgan’s Adam Holt starts with an Overweight rating. “VMware has over 90% market share [or maybe 85%, or is 86%?] and is in the rare position of having very limited material competition…with more than 1,100 developers, 400 PhDs and technology relationships with hundreds of partners, VMware has substantial assets that should enable the company to retain its lead.”
  • Bear Stearns’ John DiFucci starts coverage with an Outperform rating and a $106 price target. “While some investors may scoff at the risk inherent in such a high multiple stock, most would agree that valuation should be rooted in future financial performance of a company over time,” he writes. “And therein lies the opportunity…given our assessment of the opportunity presented by the x86 server virtualization market and VMware’s likely share of that market, we believe these multiples will eventually prove inexpensive in hindsight.”

Ok, so you would think good news for VMware should boost EMC’s stock; as noted, that has not played out that way so far. But Monday, analysts ride to EMC’s defense.


  • Citigroup’s Paul Mansky raised his rating on EMC to Buy from Hold, and upped his target to $23 from $16. He says there is a “clear valuation disconnect” between EMC and Vmware, also asserts that virtualization should be a driver for storage. “Although ultimately virtualization promises to do more with less, the ability to collaborate, more rapidly deploy applications and ultimately usher in new applications presents an attractive backdrop for storage demand,” he writes.
  • Bear Stearns’ Andy Neff raised his rating to Outperform from Market Weight, setting a price target for 2008 of $25-$28. He says you can either view the stock as an inexpensive way to buy the core EMC business, or a low-cost way to play VMW.