Wall Street Doesn't Fully Endorse VMWare Valuation

Now that VMWare has reached $100, here is a word of caution to anyone thinking about buying. This however isn't a recommendation to short as stocks can remain irrationally high longer than shorts can remain solvent.

In spite of EMC's modest move higher over the last several weeks, it has not matched the amazing surge in VMWare, of which it still holds a 86% stake.  A 86% stake in VMWare, which is valued at $39 billion, would imply that EMC owns $33.5 billion in VMWare stock.  EMC's market capitalization is $45.75 billion now.  Thus, more than 73% of EMC's valuation is attributable to VMWare.  The balance of EMC's baseline operations are worth well over $12.25 billion under virtually any imaginable circumstance or direction that the economy might take.  

I know of no adverse structural or tax reasons why VMWare stock should be trading at such a discount in EMC's hands as opposed to on the open market.  I see nothing that would prohibit EMC from distributing its remaining 86% of VMWare stock to its shareholders in a tax free distribution - a move that EMC shareholders will probably begin to beg for shortly if current valuations hold.

Rather, I don't think that current valuations will hold.  Rather, I believe that EMC's price shows that Wall Street is not really buying the VMWare valuation.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Comments

  • Anonymous

    October 10, 2007

    READ THIS IN DETAIL…

    “The firm spent $390 million to buy back approximately 26 million shares in Q2.

    The average diluted share account for the quarter was 2.122 billion. Year-to-date, the firm has spent $878 million to buy back approximately 61 million shares. This puts the firm most of the way towards its stated goal of at least $1 billion of share repurchases this year. The firm has 79 million shares remaining in its repurchase authorization.
    Additionally, the firm continues to expect to allocate a portion of the proceeds from the VMware IPO towards returning value to EMC’’s shareholders.

    EMC spent $158 million on acquisitions for its security and VMware businesses in Q2 and ended the quarter with cash and investments of approximately $5.9 billion, up slightly from Q1, nearly half of this is held in overseas operations and in VMware.�

    Should EMC share holder expecting some sort of annoucement in Q3 earning call on “the firm continues to expect to allocate a portion of the proceeds from the VMware IPO towards returning value to EMC’’s shareholders�?

    Maybe...

    They may decide on EMC’s 86% ownership of VMW share equal’s about 331 million shares… all they have to do is to distribute VMW share to EMC shareholder(2 billion oustanding). 1 for every 4 shares… EMC share price will start flying...

  • Al Milstein

    October 10, 2007

    Would a VMW Stock split than a EMC spin off give a more honest valuation to the EMC stock?

  • Carey Richardson

    October 12, 2007

    The real question is as follows:

    IF VMWARE CRASHES AND BURNS LIKE IT SHOULD, WILL IT TAKE DOWN EMC?

    The truth is that investors don't understand anything about VMWare, but there are many who understand EMC and it is a $23 stock in a down market even with VMWare trading at 0.

  • soczie

    October 13, 2007

    VMWare's valuation makes sense when you look at its perceived 5 year growth rate. I expect EMC to really move higher quickly from here.

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