VMware’s stock drops: question of faith?

VMware stock was the Wall Street technology darling with a story book beginning last year. Originally priced at $29, VMware stock (VMW) quickly soared as high as $125 last fall. However recently, the company’s stock plunged by more than 30% after VMware posted “disappointing” earnings. So what was so disappointing in the news?

VMware unveiled their financial results for the fourth quarter and full fiscal year 2007. The company showed total revenues for Q4 as $412 million, an increase of 80% compared to a year earlier with an amount of $229.5 million. Net income for the fourth quarter more than doubled to $78 million, or 19 cents per share. This was also up from the previous year of $31 million, or 9 cents per share.

Great numbers, but not what analysts were expecting. They expected VMware to report sales of $417 million and earnings excluding special items of 24 cents per share. And when they didn’t, the market reacted with disfavor and sent the price per share tumbling down. As of this writing, the stock has been moving back up, slowly, and closed at $59.30.

Along with not meeting analyst expectations, analysts also seem concerned with the competition. Perhaps they only just recently found out about Xen, Citrix, Virtual Iron, Microsoft, SWsoft, Oracle, Sun, etc. After all, these technologies have only just recently surfaced, which may have caused alarm and uncertainty for some. Tongue in cheek.

On a serious note, these other companies have started making a lot of moves and stepping up the competitive marketing campaigns. Citrix and Microsoft have been doing a bang up job lately with their talks of co-operation and product interoperability. Citrix and Virtual Iron Software have both announced new versions of their products each with added features. Microsoft just announced RTM of Windows Server 2008 and an included beta of Hyper-V, making their virtualization platform that much more real on the competitive front. Intel and AMD continue to add virtualization capabilities directly into the x86 processor, breaking down the barrier walls of entry for others to more easily enter the market.

But that hasn’t stopped VMware. They continue to advance their own product. They continue to announce new products like Virtual Desktop Manager 2. And they still have, by most accounts, the most stable and feature rich, long-running virtualization platform on the market.

So perhaps the stock will remain flat for now, as analysts figure out what the Q4 numbers mean to them and what they believe Q1 will look like for them; and they will continue to monitor competition from Microsoft and the various Xen camps as well.