I said I would stay off the board but new information reached me that I thought the longs may want to consider. As many of you know, I have been posting that valuations are too rich on VMW, and you would do yourself a favor to protect your downside. I'm a numbers person at heart, and I finally received real information on the true go forward market opportunity for intel based virtualization. These numbers have me re thinking my argument that valuations are too high. Here are the numbers for your consumption, it's a very simple analysis actually once you get real numbers on forward market growth:
2007 - intel based virtualization market opportunity - approximately 1.2 B, VMW slated to earn .64 in 2007
2012 - intel based virtualization market opportunity - grows about 10x to 12B (this is what I didn't know before)
So, I'll be resonable in my forward price estimate, I'll assume VMW maintains it's % of market captured in 2012, and then earns 10x .64 or 6.40/share. Let's assume a reasonable market P/E in 5 years of 35 times earnings.
This makes VMW worth about $224/share in 2012. There are some assumptions in here, but this is the best quantitative analysis I have seen on these boards.
so $91 today, $224 in 2012 - 146% gain using resonable go forward valuation models...not bad.
Good luck longs, I will only post with real new information when I receive it. *Go forward market numbers were received from inside IT industry forecasters*
They do some.
No where near what the Japanese do. But I am sure they will crowd out the Japanese at some point.
They buy the bonds because they dont have anything to do with the dollars since they are not yet consumption based econ.
Those dollars have to a chase a return. Acquisition etc.
Actually the Chinese own dollars but that does not mean they control interest rates....albeit the fact that they have no place to use the dollars except invest in the US since they would shoot themselves in the foot in selling those dollars.
The Carry trade is unwinding due to the collapes of the dollar so I guess I dont know who is offering the best interest in the world after currency valuation.
But it isnt the US Fed...... lol.
Rolling on the floor laughing my arse off.
Dude anyone ever tell you you like to sing to the choir???
Trying reading someone's post in context.
I was specifically pointing out that this is not nor will not be a one trick pony and the valuation models will change just like they have for the likes of Google because of the same leverage.
VMW has what many companies pay huge amounts of money to obtain with marketing.....they have BUZZ. And its all positive and its based on product and performance and the value proposition.
The best any competition can do going forward is "me too" and as a technical marketing rep....that is not a good position to be in because then you can only sell on price. And lets put it this way......Microsoft (the only likely possible player) is not going to bring down their margins with product. Because by the time they get to market.....VMW will have already provided a competing product that leapfrogs where they are now. VMW is competing against themselves so that there will be no room for another player.
Given Microsofts speed to market.....they are talking product now but it has not been unlike them to throw in the towel at the last minute and simply acquire. They missed the boat and EMC bought VMW and now MS will have to pay market valuations if they want it.
Look at all the crap MS has thrown at the industry and all the cross currents of CALs and fees and cross fees......nobody appreciates their BS anymore. And dont think for a moment LINUX is dead.
Its okay to play this stock short as well. Notice that it goes up quickly in one to two days and then goes back down to support line or travels sideways until support line catches up. Right now this support line is up to $90 at close of market. Resistance line down to $92. We break $92 on Monday and we are going to $94. Break $94 and $99 is on deck based on flag pole size.....They will probably stretch it to $99.99 just for fun. Then even I am short to the return to the support line. Its an easy $4 move and with options at this juncture you have time decay working in your favor if you write the CALLs instead of buying PUTS.
This racket is good all the way around. S&P to about 1580, I cant see any reason for this market to breakout above a 6 year channel. The econ is good but not stellar. Who knows you never fight the FED even if the Japanese control our mortgage rates with the carry trade.
The market opportunity is correct however, it is very doubtful that the stock would command a 35 multiple at that point as the market would be saturated and the growth would be falling precipitously a more reasonable multiple would be in the 14-18 range in my opinion which would put valuation on earnings at somewhere between 92 and 130. However, you'd then have to add in the cash that the company would have on its balance sheet which by that time would be fairly substantial. I don't have the whole thing modeled out so I can't tell you exactly what that number would be. I also think that you have to factor in the risk that other competitors would be in the market place and their very presence would tend to depress margins. So 6.40 may still be high.
This is reasoned and well thought out based on a static offering.
1)The places that this analysis fails is leverage of position with pull through offerings and products....IE google. Do you really believe that (a)this will be a one trick pony (b)that margins will fall even though R&D costs going forward as % of sales are expected to fall.
2)Market share achieved based on best of breed and first to market positioning.
3)Worldwide growth profiles. The reason so many large cap industrial stocks continue to defy the analysts and go up....EX Deer, Cummings....etc. Is that the analysts have been way off on their worldwide growth models for the last three years. No one can actually predict and hence analyst have used historical numbers in this regard.
I can see no reason for a company this innovative, to be restricted to only this product. With the development dollars being spun off with your own analysis....there is no reason that EPS could not be $10 or higher under your own analysis. A $350 stock in 2012.......a 300% move in 4 years......I think that puts this firmly on the road of "RULE BREAKER"
Yes the float is small. If firms wanted to short they can effectively by buying PUTS and the puts have yet to see any real action. That tells you the smart money away from shorting this puppy for a reason.
I couldn't agree more with your comments that my analysis was based on a static model - I also agree that this is not a static business. Let me offer some responses to your questions:
1. do I think it's a one trick pony - No, VMW's offering is mostly a server based virtualization solution and addresses Windows, Linux & Solaris. Virtualization also has applications in data storage (thin provisioning - IBM, EMC,HDS offer solutions) and in file shares. VMW could branch into these area's and also create other software solutions to address other needs.
2. will margins fall, rise, stay same - that's hard to say, R&D should become a smaller % of revenue, but alternate solutions will also create downward pricing pressure.
3. will market share stay the same - they are first to market and command a huge % of market to date, this metric will be hardest to maintain.
4. worldwide growth models - again hard to predict but 10x growth built into 5 year models by "experts" may be conservative OR may become excessive due to a new competing technology that also is a "rule breaker" (unlikely).
5. Tight float causes upward pricing pressure - most liely this will be true for 18 months max, then I'd expect EMC to sell shares to raise cash for other aquisitions, they most likely would maintain 51% majority ownership, but releasing 36% of shares would effectively triple float.
All in all, there are a ton of dynamic factors that move my 5 year projection. Thats why I said before it is always up for revaluation based on new information. I was simply doing a conservative base analysis designed to tell me should I invest today or not. Whether I hold, sell, or buy more in the future will be based on many of the questions you raised.
Great post Robb - I enjoy this kind of dialog. Good luck to you.
I mean no disrespect but this is the reason I wait for numbers to substantiate my point of view. When I intially stated I thought VMW was pricey, it was based on typical valuation models that point out how much earnings need to grow before you can support a 240 p/e, where we are today.
When I received the market numbers for growth I detail in my post, I reran the analysis and arrived at a more accurate target 5 years out. This is what I think is the purpose of the board - to continually update projections as more information becomes available so people can make more informed investment decisions.
Your post simply states an opinion w/ no argument to support your views. If you are going to try to counter my view, at least back it with facts. If you have better numbers than the rest of us are aware of, I'm sure we'd all like to hear them.
At the end of the day, I'm constantly searching for more facts to support my current views, I'm more than happy to admit I was wrong if new info changes projections - like I did in this post originally. Over the next 5 years things will constantly change, and we need to revise our views. In short, I don't like guessing or allowing emotion to guide my investments - if you do, that is your right, I wish you well.