On August 14, 2007, VMware became a public company and started one of the most impressive growth ever seen on the stock market.
With a launch price of $29, the first day of trading VMW closed at $51 and continued to grow up to $124.38 in October 31, 2007.
After that day the stock suffered a slow but continuous decline which saw its worse moment at the end of January 2008, when VMware presented its Q4 2007 earning reports and fell from $83 to $54.87.
Despite the first European edition of its premiere conference, VMworld, VMware couldn’t recover investors’ trust and closed this week at $51.45, the starting price of six months earlier.
What’s the reason behind this bad performance and which trend should we expect for the near future?
The first reason, which seems easy to recognize, is the major competition coming.
Less technical investors may or may not perceive as dangerous competitors companies like Citrix, Virtual Iron or Parallels, but certainly can recognize a threat in Microsoft and Sun, both heavily investing in virtualization.
Both companies are not yet concrete competitors but are very near to shipping their hypervisors: Hyper-V for the former, xVM Server for the latter.
Until this will happen and until the market will not decree if these products are or are not valuable alternatives to VMware offering, investors may want to stay very cautious.
The second reason, less evident, is the changing alliance landscape.
While Microsoft is spending limitless efforts in interoperability agreements with other VMware competitors (with Novell, with Citrix, with Sun, with Virtual Iron), VMware loses one of its biggest allies, Oracle, which prefers to build its own hypervisor rather than relying on ESX Server.
It’s true that the VMware technology partners’ ecosystem grows every day, but at the same time it’s true that some of the biggest firms around VMware are slowly changing their political position and prepares to embrace the Microsoft opportunity.
Even Cisco, which invested in VMware $150 million, seems to prefer someone else (KVM) than the virtualization leader.
Investors may feel that VMware is losing the support of the biggest firms and may become ostracized over the long term.
A third reason may be related to the corporate strategy.
In the entire 2007 and the first quarter of 2008 VMware acquired several companies but only some of them (like Propero, Dunes Technologies) seem to fit the company vision in a clear way. Some others are much harder to understand.
VMware stays mum on Determina acquisition for example, or provides very weak explanations on the reasons behind the acquisition of Thinstall, which is an application virtualization firm.
Every step VMware is taking in the last period seems to tell that the company is widening its horizon well beyond the hardware virtualization. This may be a very positive thing but investors may find very hard to perceive the value until VMware doesn’t decide to share the new long term vision in clever terms.
