VMware's stock price was down today by more than $28, from yesterday's closing price $83 to below $55.
I feel for VMware's share holders and employees. As an individual investor and a member in the job market, I know how that hurts and how much this affects the morale of an IPO company. On the other hand, I felt a little vindicated about my recommendation to a friend last year. Last year, this friend of mine received multiple job offers from several companies. In the Valley, job offers most likely come with stock option as part of the package. My friend polled my opinion on those offers and I rated VMware the last. At that time, VMware was ready to go IPO in a month.
Though my analysis included both the factors regarding VMware and the individual, it was my opinion toward VMware's product contributed to the recommendation. Virtual machine software as it being sold by VMware is a product for cost-cutting. It is aimed to cut cost for maintaining data centers for both ISP and enterprise. Eventually, the revenue and adoption have to increase at the expense of sales price and profit margin. As it does not create value for its customers, VMware's customers will only ask how much more they can save. At the same time, the competition is fierce in the same market segment. Just to name a few: Citrix bought XenSource; Google bought a start-up to do its own virtualization, and a few open source projects are in action. I always wondered why VMware's stock enjoyed a P/E ratio of multiple hundreds.
It is projected that VMware will achieve an annual revenue of $2 billion by end of 2008. If VMware will enjoy a ratio of market cap to annual revenue at between 7 to 10, the highest market cap it can get in 12 month is about today's value, 21 billion US dollars. Nevertheless, it is a profit-making company with growing prospect. Except for the hype and stock price, it is a respectable company in most aspects. Compared with VOIP companies, which also offer cost-cutting products with fierce competition but little revenue, VMware is delivering share holder value with no doubt.
I feel for VMware's share holders and employees. As an individual investor and a member in the job market, I know how that hurts and how much this affects the morale of an IPO company. On the other hand, I felt a little vindicated about my recommendation to a friend last year. Last year, this friend of mine received multiple job offers from several companies. In the Valley, job offers most likely come with stock option as part of the package. My friend polled my opinion on those offers and I rated VMware the last. At that time, VMware was ready to go IPO in a month.
Though my analysis included both the factors regarding VMware and the individual, it was my opinion toward VMware's product contributed to the recommendation. Virtual machine software as it being sold by VMware is a product for cost-cutting. It is aimed to cut cost for maintaining data centers for both ISP and enterprise. Eventually, the revenue and adoption have to increase at the expense of sales price and profit margin. As it does not create value for its customers, VMware's customers will only ask how much more they can save. At the same time, the competition is fierce in the same market segment. Just to name a few: Citrix bought XenSource; Google bought a start-up to do its own virtualization, and a few open source projects are in action. I always wondered why VMware's stock enjoyed a P/E ratio of multiple hundreds.
It is projected that VMware will achieve an annual revenue of $2 billion by end of 2008. If VMware will enjoy a ratio of market cap to annual revenue at between 7 to 10, the highest market cap it can get in 12 month is about today's value, 21 billion US dollars. Nevertheless, it is a profit-making company with growing prospect. Except for the hype and stock price, it is a respectable company in most aspects. Compared with VOIP companies, which also offer cost-cutting products with fierce competition but little revenue, VMware is delivering share holder value with no doubt.
