VMware: Dominant in Its Market, But Upside Priced In?

| About: VMware, Inc. (VMW)
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VMware’s (NYSE:VMW) third quarter earnings report Wednesday night triggered a flurry of Street commentary, and a mad scramble to raise price targets. Several of the notes point out that the company did not provide any financial guidance, leaving the Street to its own devices on what happens from here.

The drivers for the company and the stock remains the same, however: VMware totally dominates the rapidly emerging server virtualization market, with little current competition. Demand is high, and the value proposition is compelling: install the software, cut your hardware costs. Note as well that the stock is actually pretty thinly traded, with EMC (EMC) maintaining an 86% stake, Fidelity controlling close to a quarter of the float, and short-interest considerable. It’s a recipe for a stock gone vertical.

Here’s a rundown on some of the comments - and the revised targets - from the Street Thursday morning. I’ll give you the bulls first, then the bears.

  • Shebly Seyrafi, Caris & Co.: Target to $135, from $125. “Investors may be perturbed by the lack of formal guidance for Q4, but we still expect strong seasonal growth.”
  • Heather Bellini, UBS: Target to $130, from $120. “Living up to its hype.”
  • Brent Thill, Citigroup: Target to $134, from $100. “The #1 issue: VMW management failed to give Q4 guidance, which we believe is a mistake as it could potentially lead to highly divergent ests. and more stock volatility.” Thill sees no threat from chief rivals Microsoft (NASDAQ:MSFT) and Citrix (NASDAQ:CTXS) until at least 2009.
  • John DiFucci, Bear Stearns: Target to $132, from $106. “VMW provides the right technology to address apressing need at the right time.”
  • Katherine Egbert, Jefferies: Price target to $129, from $89. “Operating margin upside gives us confidence the company can invest in growth and scale the business simultaneously…a virtually perfect quarter.”

Even the skeptics raised targets, though many are significantly below the current price:

  • Jonathan Ruykhaver, ThinkEquity: Target to $90, from $60. “Current market valuations do not discount looming long-term serious competition that has the potential to dampen VMware’s current impressive growth and margin expansion long term.” Maintains Source of Funds rating.
  • Israel Hernandez, Lehman: Target to $95, from $80. “Most of the upside is already discounted in the stock.”
  • Thomas Curlin, RBC: Price target to $85, from $80. “We believe EMC is considering capitalizing on the scarcity value of the shares before the tax-free spin-off date of January 2009. The feasibility of doing so in a tax-free manner will be the primary consideration…Any dilution related to the issuance of additional VMware Class A shares could negatively impact our price target.”
  • Jason Maynard, Credit Suisse: Maintained target at $85. “The premium valuation throughly reflects the company’s market leadership position and growth potential, but makes it difficult for material upside.”

VMware at time of publication is up $10.56, or 10.2%, at $114.08. The company now has a market cap of $43.7 billion. The stock is up 293% since its $29 IPO in August. EMC, which reported earnings Thursday morning, is up $1.79, or 7.9%, to $24.32, a new 52-week high.