Friday, June 25, 2010

VMware (NYSE:VMW): Heavy discounting will lead to earnings misses in 2H10, Init Sell & $40 target - Capstone

Capstone Investments is making a major negative call on VMware (NYSE:VMW) initiating the tech high-flier with a Sell rating and a whopping $40 price target.

It gets worse, folks. Reading the call it looks like Capstone analyst James Gilman (CFA) is accusing VMware management of artificially propping up license revenue by offering 'shadow' discounts of up to 70%, that haven't shown up in the income statement side yet.

They believe the discounting has continued since Q409, albeit on a smaller scale. They expect this discounting to lead to revenue and earnings miss in 2H10.

Capstone notes they come to these conclusions after performing a detailed analysis of deferred revenue due to the exceptionally large sequential increase in current deferred revenue in Q409 absent a corresponding proportional increase in revenue from license sales.

Firm notes they contacted VMW management but as Gilman says '...Their response and explanation only fueled our curiosity. If they were able to address our concern then we would have dropped this subject, but we thought management downplayed our question by reiterating information from the 4Q09 earnings call... '


Notablecalls: There are two reasons why I cannot share more of this call with you:

- First, the call PDF is copy-locked.

- Secondly, Capstone is a small firm and they have clearly invested a lot of time & money into digging up all this. It would certainly be unfair for me to share the details with non-clients.

So if you want the deets, call them up and set up a relationship with the firm. I'm sure many inst. players that are long (or short) VMW will do just that today.

So, what to do with the stock?

Ask yourself this - with the stock trading 16x FCF (gazillion times EPS), would you still want to be long the name if Capstone is proven right?

For one, I'd want to be short.

The market right now is in shoot-first-ask-questions-later mode so I expect VMW to get hit once the call starts circling the desks.

In the very short-term, I'm looking at $65 as the 1st level & possibly $61-62 over the next few days if panic sets in.

I really don't think people take kindly to financial shenanigans.

PS: Also, ask yourself this - what would happen to the stock if the call was coming from J.P. Morgan instead of Capstone?

2 comments:

Darren said...

market doesn't seem to be reacting to this..I wonder why

Settembrini said...

Just last week someone told me buy VMW--well, I bought C