VMWare is certainly an exciting new company- their virtualization software is the best product in a very rapidly growing market. Many have compared the IPO to that of GOOG (which is probably an exaggeration). The IPO priced at 29 and opened at 54. It is currently trading at a market cap of 19.7 Billion.
EMC's holdings in VMware are worth 18 Billion. As of today's prices the market is valuing the rest of EMC at only 20 Billion. EMCs total valuation hasn't been this low since 2003. Despite very healthy growth in the underlying business.
So either VMware is grossly overvalued or the rest of EMC is undervalued. Either way the best way to play VMware is to buy EMC. It may make just as much sense to buy EMC and short VMW to isolate the undervaluation of the rest of the company.
Comments
jasonb81
August 16, 2007
EMC seems like a great buy now. It's a growing stock, with a relatively low multiple, with a rocket booster attached to it (VMWare). What am I missing?
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Sam Cass
August 16, 2007
Excellent post. I do think there is an opportunity here and I like your long/short strategy to take advantage of it. Tech seems to be gathering momentum as other sectors falter (real estate). Of course tech could also get dragged down but it seems less likely and investor enthusiasm seems strong.
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Sanjay
August 16, 2007
I don't know why this it is like that. There is another company sybmol TATTF which ownd 68% of LIMC (market valuation based on yesterday close of LIMC is $100 million alone) and currently TATTF's market cap is less than it's holding in LIMC. This is despite TATTF earning $1.2 last year.
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fernando
August 16, 2007
Does EMC have some kind of liability that is depressing its price? Maybe that's the same reason for TATTF?
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Mkhan
August 16, 2007
The real problem here is Jim Cramer which I wrote about in an earlier article here:
http://www.bestcashcow.com/stocks_-_options_-_mutual_funds/article/mkhan/jim-cramer-is-scaring-the-livid-daylights-out-of-me
Cramer started pushing EMC as the way for his followers to get into the VMWare IPO when EMC was at 19.30. WMWare doubled on the IPO yesterday, but when the rest of the market crashed, all of Cramer's followers (who are fast and volatile money) sold, sending EMC down to around 18.30. Even though he doesn't understand VMWare at all, Cramer is still pushing EMC as the way to play it, attracting more and more fast money. I now think that if VMWare comes down a little one day, Cramer will change his mind on EMC, sending the stock down another 5 to 10% to the high 16's. Then and only then will I buy more (I already have a ton), and I will mortgage my house and my inlaw's house to buy, but I am going to hold off until then.
By the way, I wouldn't dream of shorting VMWare. Just don't do it.
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CK
August 16, 2007
It seems to me that VMWare might be overvalued and EMC accurately valued. Instead of EMC going up, it's just as plausible that VMWare will come down.
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CK
August 16, 2007
@MKhan - Most of the buyers yesterday were institutional. I doubt Cramer had much of an impact on them.
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Thomas
August 16, 2007
The wise thing to do is to avoid until things are clearer.Now,we should hold cash until the coming crash is finalized.By that time,buy emc,vmw,csco,aapl or other solid or undervalued tech.Wait,until Macy's has 70% discount.
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Terry Casto
August 16, 2007
Someone has posted an excellent explanation of VMWare here. Everyone should have a look at this and try to understand it before pretending to know anything about this space.
http://www.bestcashcow.com/stocks_-_options_-_mutual_funds/article/sam_cass/vmware-explanation-and-cnbc-coverage
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Ralph Smith
August 22, 2007
EMC is one of the very, very few stocks that is very, very interesting as a long here.
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