VMware shares shed $1.47, or 4 percent, to $39.52 in afternoon trading Friday following a downgrade from Goldman Sachs analyst Derek Bingham.
Bingham, a longtime VMware bull, cut the stock from a “buy” recommendation to “neutral,” citing the stock’s high valuation (currently trading at a price-to-earnings ratio of 62.70) and the fact that it was closing in on his established 12-month price target of $44 a share.
“We remain bullish on longer-term opportunities for incremental upside for VMware — in particular, newer virtualization management products and virtual desktop,” Bingham wrote in a research note. “However, our initial work does not suggest enough upside to continue to lift our price target, and the company’s valuation premium is significant at 36X CY10 EPS.”
Earlier this month, VMware easily eclipsed analysts’ estimates in its third quarter, posting a profit of $95 million, or $0.24 a share, on sales of $490 million.
Analysts had forecast a profit of just $0.20 a share on sales in the vicinity of $470 million.
VMware CEO Paul Maritz gave investors even more confidence when he raised the company’s fourth-quarter sales forecast to between $540 million and $560 million, well above its previous guidance of roughly $523 million.
“The sun is going to come up again and people need to start thinking about it,” Maritz said during a conference call with analysts. “But they know they need to be cautious and not go out on a limb. The welcome news here is that people are starting to think in longer term horizons and not just immediate survival.
Last quarter, VMware topped analyst estimates when it reported a profit of $0.20 a share on sales of $456 million.
Bingham said another factor contributing to his decision to downgrade the stock was the fact that “much of the potential upside to CY10 and CY11 estimates is currently anticipated” in the stock price.
VMware shares peaked at $45.57 a share immediately after the third-quarter earnings report. The stock was trading as low as $17.88 a share in December.
After Bingham’s downgrade, 20 of the 33 analysts tracking the stock maintain either a “hold” or “neutral” recommendation.