VMware Inc. (VMW)

Valuation of the stock is astronomical. Growth has been priced in and then some. The stock price is more than 40 times estimates for 2009. This is a high multiple even for the technology industry, especially considering that the consensus earnings numbers are likely to be a bit aggressive. The stock has bounced from its low and has likely set up a good short entry below $70.00. The overall market will have a good bit of influence on the short-term direction as the name is a fairly popular technology investment.

Competition from MSFT and CTXS threatens to squeeze margins. As both Microsoft and Citrix launch competing products this year, it will likely cut into the established position VMW has cultivated. While management talked a big game about not needing to reduce prices, this is simply part of the positioning game as it would be unwise to signal to clients that a potential price decrease is in the wind. But once new entrants hit the market, there is a high probability that prices will decrease as the three companies compete for customers.

Credit Suisse has three main issues that could lead to a lower addressable market and theoretically a lower growth rate. These issues are:

• A Secular shift to multi-core processors. This means that many servers will be able to handle multiple applications without necessarily needing virtualization software.
• Decreasing memory constraints. As memory becomes cheaper and more available, it may become less important to use VMW’s software to add efficiency.
• Potential change to “per server” licenses. Changes in overall licensing processes may reduce the benefits of a virtual approach to server management.

Focused mainly on the enterprise. Second tier consumer/desktop virtualization offerings may limit growth in those areas.