Don’t Get Caught in the Stampede

Apple and VMware took the rap when Cisco’s warning and Oracle’s virtualization announcement panicked tech investors. That was a mistake.

At other times, the market overcorrects the other way. A spate of bad news makes investors nervous, and suddenly everyone is looking for an excuse to run for the exits. That’s what happened last week. With all sorts of bad macro news — the continuing market meltdown, rising oil prices and the limp dollar — investors had reason to be nervous.

Then came Cisco’s first-quarter earnings call.

In fact, it was a very strong three months. First-quarter revenue was $9.6 billion, up nearly 17 percent from $8.2 billion in last year’s first quarter. Net income rose more than 37 percent to $2.2 billion from $1.6 billion a year earlier. Earnings per share were $0.35, up from $0.26 in last year’s first quarter. What’s wrong with that? Sales to the U.S. financial sector were weaker than expected.

Investors took that as a very negative signal, and to be fair there was certainly reason. But one of the companies that took a major hit was Apple. Say what? Of all the major computer companies, Apple has the least exposure to enterprise sales, and its consumer business, headlined by the iPhone and the iPod, is terrific.

Part of the reason for the slide: momentum players. These are hedge funds and other institutions that trade directionally over the short run. When a stock moves down, short sellers can get into the game, and suddenly the stock is really tumbling. That in turn upsets the broader market, particularly retail (Wall Street lingo for Mom and Pop) investors who sell.

Apple recovered nicely on Tuesday, along with the broader market, and got a big boost from news of strong iPhone sales in the U.K. and a possible big deal in China.

Meanwhile, Oracle kicked off OpenWorld with an announcement that it was jumping on the virtualization train.

Kaboom went shares of VMware. Investors with positions in VMware and EMC, which owns most of VMware, freaked. VMware, the hottest IPO of the year, had been sliding anyway. But the Oracle news got it tumbling.

Interestingly, there are a lot of questions about what Oracle is really going to do about virtualization. Benchmark analyst Brent Williams put it this way: “We believe a product likely to add de minimis revenue to Oracle’s deal size is unlikely to attract significant attention from Oracle’s sales force, and thus is unlikely to be featured in significant numbers of deals.”

Similarly, Citi analyst Brent Thill said in a note to clients: “Oracle’s announcement to offer and support their own flavor of the Xen open source hypervisor does not affect VMW’s position as the

de facto standard in server virtualization. Xen, as an open source project, is already freely available on the web or through other vendors. VMware’s own base hypervisor technology, VMware Server, is available as a free download.”

The Benchmark analyst noted something that struck me right away: The virtualization announcement is reminiscent of the big splash Oracle made with “Unbreakable Linux,” a splash that temporarily swamped the share price of Red Hat. As it turns out, “Unbreakable Linux” isn’t much of a factor in the market at all.

That’s not to say Oracle won’t make headway in virtualization. But not right away. Meanwhile, VMware’s release of Server 2, its free virtualization product, is getting rave reviews.

So, morning-after thoughts by analysts, plus the Server 2 release, turned VMware around.

The bottom line: There’s obviously reason to worry about the strength of tech sales going forward, but take a deep breath and look closely before you sell. Indeed, the dip in VMware’s value might well have been an opportunity to buy some shares at a nice discount. (In fact, I did that very thing, and now hold a small position in VMware.)

I welcome your comments, tips and suggestions. Reach me at bill.snyder@sbcglobal.net