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August 14, 2007
VMware Opens Up 79%: Lessons and Implications
With VMware's IPO pricing at the high of its range last night, and then opening up 79% on the NYSE (on a day when the S&P 500 is off 1%), it's hard not to feel positive about tech stocks. Back shortly with some more detailed musings.
Some thoughts:
1) Enterprise software is resurgent. Granted, not all of enterprise software is turning the corner, but it's hard not to take serious an enterprise software company growing revenues more than 75% year-over-year, that turned in $700-million in sales last year, and that will do more than $1.3-billion this year.
2) Tech IPOs can still deliver. This company had huge buzz, had its pricing range increased pre-IPO, and still opened up more than 70%. Anyone want to argue that tech IPOs can no longer open strong?
3) We're about to see a bunch more tech IPOs. While there are precious few VMwares out there, that won't stop bankers and VCs from bringing a host of IPO product public (assuming the market settles down from its current credit concerns. Given the amount of equity product that has come out of the market in recent years, it's about time.
Feel free to add more. Kyle has a good comment here on another post.
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This is a one time event, with no particular implication to the tech IPO scene. Remember VMWare's own history: acquired by EMC, then EMC realized they could really milk this puppy in an IPO.
Watch for VMWare (the stock, not the company) to settle at well below the first day pop. It is a great company, but ain't worth what IPO starved momentum players are willing to pay today.
And the credit concerns are a *lot* bigger than you assume, Paul. They could make the stock market *and* real estate toxic for many years (remember Japan?)
I tend to agree. It was off the radar, but look at BladeLogic. They went out at $17 and rose 42% on the open. Still maintaining those gains. This was on the back of the HP/Opsware deal, but good tech companies seem to command anywhere from 10-20X multiples right now, even in this turbulent market.
I am not sure VMW and/or BladeLogic performance can be generalized to tech IPOs. I wonder how much of this has to do with finding an alternate alpha bump given the market woes of late. The true test will be how fast initial investors flip to realize gains.
Vmware will NOT settle far below the price from yesterday. Less than 5% of all x86 servers are running in a virtual environment. That leaves 95% of the servers as candidates for Vmware. Also, you all fail to realize that they have a product called Virtual Workstation. HPQ is spending MILLIONS creating their own virtual desktop initiative, spearheaded with this product. This company WILL double its revenues for next fiscal year and if workstation takes off.......it might even be bigger than their VI3 product. For someone that sells this stuff daily, I can tell you that corporate America is clamoring for this technology and people are spending BOATLOADS on it, including the Federal Gov. 100% of Fortune 500 companies use Vmware. In one year I can tell you that 100% of Fortune 1000 companies will be using it.
the value proposion that pops up most is that x86 servers have an average cpu utilization of 8%-12%, this is generally accepted by most consulting firms. The less than stellar utilization is a prime candidate for server virtualization. The cost savings to a corporation is tremendous. Less Hardware, less maintenance costs and less human resources to manage it.
Do not confuse this technology with storage virutalization, its completely different and storage virtualization has had a luke warm reception while server virtualization is white hot, specifically in UNIX environments (IBM and SUNW provide for logical partitions). VMW is a dominant player in the x86 market. DELL, HPQ and IBM have invested MILLIONS of dollars creating Vmware consulting practices. Sunw has jumped on the bandwagon. INTEL and CISCO both invested heavily....why? because they SEE THE PICTURE. Many of you do not. Go to vmware's website and read up on the company. Then go check on their competitors, none of which stand a chance, except maybe Microsoft who is at least two years away from having the funcationality of Vmware. My clients prefer to PAY FOR VMWARE than take MSFT's current product for free.
The way to play VMW is to buy EMC. It is unbelievable that EMC has not traded higher with the success of this IPO. At $52 per share, VMW represents 7.90 per EMC share. You are buying EMC for $10.50 per share without VMW. That is where EMC was before it bought VMW 4 years ago, and EMC had @$6.2b in sales. Today they have $12b, with no move up in four years??
It is only a matter of time before EMC is a takeover target if they don't trade more in line to reflect the VMW value. Remember, EMC still owns 87% of VMW and they now have over $6b in cash. Back up the truck on EMC.
Please look here before investing to know the whole story:
http://linux.slashdot.org/linux/07/08/14/1618241.shtml
"Nailer writes, Bloomberg believe VMware's IPO today may the largest technology offering since Google. But doubts have been cast over the company's supposedly proprietary ESX product, as top 10 Linux contributor Christopher Hellwig claims the software may violate Linux kernel copyrights. 'Is Hellwig right, and is VMware a derived product of Linux? Unless vmkernel can be loaded without the Linux kernel, it would appear so. VMware was developed from another, long ago OS created as a research project, but it's unclear whether vmkernel was ported from that OS or rewritten as the Linux-requiring binary blob. What's more of an issue is that VMware had these serious questions posed directly to them a year ago, repeated in a public forum many times since, but have yet to respond at all.'"
Paul
Not sure you can draw enterprise software is back from VMWare IPO. The "traditional" enterprise software model is still broken - multi year upfront license fees is still unacceptable to most IT organizations. But the try as you go and show me value each time model is here. VMWare exemplifies (sp?) that model.