VMware Facing Tough Times, Shares Down 16% And Could Drop Another 20% By Year’s End

VMware shares are off to a rough start in 2013. They are down 16 percent since the beginning of the year, with expectations that shares could drop another 20 percent by year’s end.

Barron’s, which reported the outlook this morning, examines the numbers pretty thoroughly.The stock enjoyed a big run that started at the depths of the recession in November 2008 at $18 and climbed more than 300 percent to a recent price of $79. Today the stock closed at $77, near its 52-week low of  $76.25 per share. The high for the share over the past 52-weeks is $118.79.

But over the past 12 months and so far this year, shares are off — in part due to the poor financials it reported on January 28. Most notably, VMware’s revenues for the next quarter and the year ahead are below expectations.

VMware attributes some of the decline to a new model of subscription-based revenues. But that’s only part of the story. Let’s face it, VMware represents the end of an era.

The company’s lightning growth came partly from the massive demand for its virtualization technology as IT departments everywhere sought to consolidate its servers, running amok with enterprise software stacks. VMware’s revenue outlook shows that the demand for its “hypervisor” technology is beginning to wane. As Barron’s points out, the party is not over, but it certainly is not like the good old days.

VMware is readjusting to these new times, but it’s unclear how well its spate of acquisitions will fare. It acquired Nicira for $1.26 billion to gain a foothold in the software-defined networking space. n 2011, it bought Socialcast and SlideRocket to move up the stack, putting it in deeper competition with Microsoft.

And then there’s the cloud, with VMware’s promise of becoming a leading cloud service. That path has yet to show its promise. Cloud Foundry, its bright open-source star, is now part of EMC, which owns 80 percent of VMware. Former VMware CEO Paul Maritz is running what is now called the “Pivotal Group,” which will include Cloud Foundry as part of a deeper play to provide an analytics and application development platform.

In all, VMware’s share price and overall revenue outlook shows how much IT has changed. Internet-scale, self-service IT is the future of the way we live and work. Virtualization with a managed services layer on top still has value, but mostly for legacy software that big companies use to manage back-end operations.