Great company it may be, but VMware’s share price is starting to exhibit some very bubbly symptoms.
The virtualisation software company’s shares are now trading at more than three times what they were sold for at the time of its IPO less than two months ago. That has lifted its stock market value to $34bn, and raised the value of EMC’s remaining stake in the company to around $30bn.
This is where things start to get weird. EMC’s total market value is only $44bn. Sure, it has been buoyed by the VMware IPO, but to nothing like the extent that would seem logical given what’s happened to the VMware stock.
It is all faintly reminiscent of what happened when 3Com sold a small stake in its red-hot Palm division during the tech boom. Back then Wall Street accorded Palm a valuation well in excess of 3Com, even though 3Com continued to hold most of the stock.
Of course, things righted themselves pretty fast. 3Com rushed through with a spin off of the rest of Palm, the market became flooded with Palm stock, and the price collapsed. Something similar could be in store for VMware shares if EMC decides to distribute a sizeable portion of its holding. A “lock-up” agreement prevents any of the VMware holders from selling until six months after the IPO, so the scarcity premium may last a while longer, but it seems a fair bet that supply will quickly catch up with demand after that.
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