VMware stock tumbles; virtualization leader's future cloudy

Investors wary as Microsoft, other big players take challenge EMC's VMware

VMware stock plunged this week by more than 30% after the EMC-controlled company posted disappointing earnings influenced by challenges from large vendors such as Microsoft and Citrix who are expanding into the field of Microsoft virtualization that VMware has long dominated.

VMware revenue is still growing, increasing 80% in the fourth quarter of 2007 over the previous year, and EMC projects revenue to grow another 50% in 2008. But both of those numbers fell short of analyst expectations, and the stock fell 34% to US$54.87 Tuesday.

After a wildly successful IPO last August, VMware is "now likely to be a 'show me' stock," UBS analyst Heather Bellini wrote in a note to investors, according to the Associated Press.

EMC CEO Joe Tucci called the price drop a "hell of a reaction," according to the Boston Globe, saying it's a young stock that can be expected to have some volatility.

VMware stock reached its peak on October 31, trading at US$125.25. After Tuesday's debacle, the stock hit a low of US$53.57 Wednesday morning, but made a slight gain and was trading at US$56.41 on the New York Stock Exchange at 11 a.m. EST.

EMC kept 90% of VMware stock after the IPO. VMware remains a major presence in the x86 server virtualization market with more than 100,000 customers. But Microsoft is taking a run at VMware's market leadership, last week announcing the acquisition of start-up Calista Technologies and other strategies to improve its virtualization offerings. IBM this week announced PowerVM virtualization for its own System i and System p servers.

Citrix, meanwhile, is taking a charge at the virtualization market with last August's acquisition of open source vendor XenSource.

Hardware advances will also force VMware to find new ways to differentiate itself in the coming years, as Intel and AMD are building virtualization capabilities directly into the x86 processor.

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