November 29, 2007, 10:47 am
VMware: Merrill Ups Rating To Buy; Sets $105 Target
Posted by Eric Savitz
Merrill Lynch’s Kash Rangan today raised his rating on VMware (VMW) to Buy from Hold, and set a $105 price target on the stock.
“We believe VMware is emerging as the virtualization platform for next generation data centers,” he wrote in a research note. “Our work suggests the Street is pricing in a 30% probability that VMware will maintains its dominant market position, and 70% probability that it will end up as an oligopolist. We think the probability that VMware will maintain its dominant position is better than this.”
Rangan works through two scenarios for the future of VMW. One is that by 2011 the company still has 70% share; if that’s where we’re headed, he says, the stock is worth $143 right now. The other scenario is that the company has 40% share in 2011. That approach, he says, implies a current valuation of $62. Weighting the two scenarios, he comes up with his current $105 target. “Microsoft (MSFT), Citrix (CTXS) and Oracle (ORCL) are risks, but these competitors are 2-3 years behind VMware’s functionality and partner eco-system,” he writes. “VMware has to keep its technological lead in order to maintains its market share.”
In another note this morning, Citigroup’s Brent Thill discusses the prospects for VMW’s new ESX Server 3i software, a thin hypervisor that will be pre-installed on servers from Dell (DELL), Fujitsu, Hewlett-Packard (HPQ), IBM (IBM) and NEC. Thill says the thin version of the software “is a significant step towards enhancing VMW’s already dominant position in the virtualization industry,” and a “pre-emptive strike” against future Microsoft and Citrix/Xen releases in the battle for the x86 server virtualization market.
Thill says that, assuming a lack of legitimate competitive threat until 2009, and the success of the thin version of its hypervisor, FY 09 earnings could be as high as $1.81 a share, well above his current estimate of $1.50.
VMware today is up $3.13, or 3.6%, at $90.82. The stock is now up almost 27% since Monday’s close at $71.44.
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