VMware: Lost in the Clouds?

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Cloud computing giant VMware shares fell out of the sky today to the tune of 21%, is it justified?

VMware Inc (VMW) shares tanked 21% today and hit a new 12 month low. VMW closed down $21 to just over $77 a share.  The company was killed on its 'soft guidance' and traders are not going to pay high multiplies thus dumping the stock.

VMware's guidance didn't sound terrible, the company expects Q1 revenue in the range of $1.17 billion to $1.19 billion with 2013 total revenue at $5.23 billion to $5.35 billion. Analysts had expected $1.25 billion for the first quarter and $5.42 billion for the year.  What got the attention today was VMware's plan to cut  900 jobs, which is 7 to 8% of its global workforce.  It's a bit of a mystery as the company said their head count will still increase by about 1,000 this year despite the layoffs. Smoke and mirrors trick maybe?

Traders didn't seem to believe that the good times will continue at VMware.  The short sellers ruled the tape on VMW today and the 13% short float did not work in longs favor.  High frequency trading had to be involved as volume on VMW hit 27.8 million shares compared to the normal 1.8 million.  Every financial news site and blog had an opinion on VMware today and the overall tone is negative.  The analyst activity was also busy as all get out, here are the ratings today thanks to finviz.com:

29-Jan-13 Reiterated UBS Buy $125 → $115
29-Jan-13 Reiterated RBC Capital Mkts Sector Perform $95 → $90
29-Jan-13 Reiterated Oppenheimer Outperform $110 → $100
29-Jan-13 Reiterated Mizuho Buy $115 → $100
29-Jan-13 Reiterated FBR Capital Outperform $130 → $115
29-Jan-13 Reiterated Barclays Overweight $125 → $120
29-Jan-13 Downgrade Wunderlich Buy → Hold $100 → $75
29-Jan-13 Downgrade MKM Partners Buy → Neutral $125 → $77

Taking all those estimates into consideration just on the target price alone and it comes out to an average of 25% increase 12 months from now.

Target Price % Increase
 $    115.00 49.1%
 $      90.00 16.7%
 $    100.00 29.6%
 $    120.00 55.6%
 $      75.00 -2.8%
 $      77.00 -0.2%
   
Average: 24.7%

Bottom line: Mastery will wait until the dust settles on VMware. It's a roll of the dice if the falling knife continues or we get a dead cat bounce. 

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