VMware: Fine Quarter, But Still a Dog

VMware (VMW) reported a solid Q1 yesterday, with revenue and EPS coming in at $438 million (ahead of consensus at $422 million) and $0.22 (in line with estimates). Shares are soaring, but the quarter wasn’t enough for Credit Suisse:

Despite better-than-forecasted licence revenue, our long-term thesis remains unchanged….we believe that Wall Street has largely misunderstood three longer-term potential negatives that could significantly impact the size of the addressable market:

1) the secular shift to multi-core processors;

2) decreasing memory constraints;

3) the potential change to per-server licensing.

CSFB also cut its EPS estimates, raising its 2008 revenue estimate from $1.874 billion to $1.921 billion, but lowering its pro forma EPS estimate to $0.96 from $1.00. Bottom line, Credit Suisse doesn’t think VMware deserves the momentum multiple the market is again awarding it:

In our opinion, VMware’s current stock price is based on overly optimistic growth assumptions, and we expect valuation to decline to reflect the long-term smaller market potential realities of the server virtualization market. VMware trades at a Next Twelve Months Enterprise Value / Revenue multiple of 12.3 times our estimates, which is a premium to the broader software industry’s weighted average of 3.8 times.


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