Sacconaghi notes that in a majority of cases, the stocks underperformed in both the quarter and the year following the time at which they reached the 20x trailing sales level.
Sacconaghi notes that only two stocks - XM and its rival and potential merger partner Sirius - were able to maintain a multiple that high for a year or more; of course, again, both stocks subsequently traded sharply lower.
Sacconaghi is not making a fundamental call here on VMW; he’s just saying that the valuation has reached a level that other high-fliers have not been able to sustain. The irony is, Sacconaghi did this assessment in connection of his coverage of EMC, which he continues to rate Outperform. Sacconaghi says that if you give EMC full credit for the value of its VMW stake, then core EMC is worth just $5.50 a share, which gives it a P/E of about 7.6X 2008 estimates EPS, or a 50% discount to the market; he says EMC deserves about a 10% premium to the market, which implies investors are discounting the value of EMC’s VMW stake by about 47%.
Simple question: What about the high performing stocks that kept performing higher and kept selling even after that 2002-2006 era? Should VMware necessarily be on the falling side. I must tell you so far there has been a lot of noise but expect some real good open source initiatives like Xen, KVM, there isn't one proprietary vendor that is really challenging VMware. Sure, this may change, but right now it still looks like it looked half a year ago. Microsoft's virtualization product is slated to hit the market in Aug 2008 (If all goes well and no delays are experienced), Citrix is warming up but is faced with the challenges of integration. It will go down but it won't fall as abruptly as it rose.