Thoughts on VMWare (VMW) and EMC Valuation

I’ve been resisting any comment on this topic, but I just had to note something.

VMWare, after its IPO at $29 per share, crossed over $100 today to close at $101.61. Since they have 383 Million shares outstanding, that’s a market cap of $38.91 Billion. EMC closed at $21.81, and with 2.1 Billion shares outstanding, their market capitalization is now $45.75 Billion.

On the surface, that looks like a generous valuation for EMC. P/E of 26 on 2008 earnings projection, which is more than double their 5-year expected growth rate of 12%.

But, let’s factor out a few assets here.

They have over $4.5B in cash. They also hold a 87% stake in VMWare, which at today’s close, is worth $33.85 Billion.

So that means, you are basically buying all of EMC right now for $7.4 Billion, which gets you a $12B+ revenue business with a net margin of 10.8%.

That just doesn’t make any sense, on its surface. My guess is you are seeing two factors at play here:

  1. There are liquidity issues with VMW, which are pushing up the valuation artificially. No options, no real shares to short. As a result, the EMC valuation is discounting the VMW stake to a more realistic value.
  2. VMW valuation is being driven largely by large consumer interest, and that interest just isn’t doing the math on EMC which is broadly held by professional investors and indexes.

Personally, my trade in this area has been a winner, but still disappointing. Since I couldn’t get VMW IPO shares, I used a put spread (Jan 2009) on EMC, 17.5 and 25, to capture value as EMC appreciated, and to generate the cash to buy EMC 17.5 calls at a 10:1 ratio of my desired VMW position. I closed out the put spread last week, and now just have the calls which are deep in the money. Overall, the position has returned 80+%, which is great, but doesn’t quite capture the 300% return of VMW post-IPO. Of course, this is because it’s clear that EMC was pricing in the IPO in the run-up from 12 to 19 ($14B worth) from the Feb IPO announcement.
So the only question remaining is, when will VMWare be worth more than EMC? 🙂

eBay Launches Social Networking… or at least, Neighborhoods

eBay launched Neighborhoods today, part of their big push to re-invigorate activity and excitement around the core of the auction platform.  eBay was built over people connecting about the products and categories that they collect and sell, and this effort definitely attempts to recapture more of that original community feel.

What are Neighborhoods?
Think of Neighborhoods as a gathering place for fans of a certain product, team, artist, and more. They’ve been created around popular items and searches and are designed for members with a very specific interest in mind.

For example, if you’re crazy about Audi automobiles, steer yourself over to that Neighborhood. Or maybe you love the “Slippery When Wet” album…the Bon Jovi Neighborhood could be for you. You’ll be able to find links to Neighborhoods on applicable search results pages and the Community hub, or simply search for them at

Within a Neighborhood, you’ll find a discussion board dedicated to that topic where you can ask and answer questions, brag about your latest auction win, or discuss what’s new. You can upload and share photos related to that topic – and vote on which are best – or check out related listings, reviews, guides and blogs. You can even use our tools to see who else is part of that Neighborhood, or to find other Neighborhoods that might interest you.

Auctionbytes covered the launch basics on their site as well.

You can find eBay Neighborhoods here.  I joined this neighborhood dedicated to the Apple iPhone here.  Performance is incredibly slow right now, but I’m assuming they are working out the kinks there.

I caught some flack a few weeks ago for a post I wrote on Ning, where I basically argued that eBay should have acquired Ning before it received financing at a $200M+ price tag.  At the time, I compared it to eBay Groups, which was the 2004 effort by eBay to upgrade their community functionality.  Clearly, eBay Neighborhoods is a much fairer comparison.