All Things Digital

RBC Capital got religion this morning on the slowdown in IT spending, cutting ratings on four stocks and slashing estimates and price targets on a host of others. The multiple moves boil down to this statement, which is repeated in most of the individual reports this morning: “We are taking a more conservative stance across our coverage universe to reflect a degrading environment for global IT spending.”

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Yesterday afternoon, I posted a list of how some of the most prominent stocks fared in Wednesday’s mammoth selloff.

Given today’s equally dramatic rally, I thought the list deserved an update–I’ve added just one stock, Microsoft (MSFT), which I inexplicably forgot to include yesterday. All of the stocks on the list were down yesterday, except Dell (DELL), which had been hit on Tuesday, and Seagate (STX), which was unchanged. Today, all the stocks on the list were higher, except for VMware (VMW) and its parent, EMC (EMC). The one stock that best captured what’s been going on: Western Digital (WDC), down $1.89 yesterday, up $1.89 today.

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This should be a big week for VMware (VMW), which is holding the annual VMworld conference this week in Las Vegas. But so far, the event is not doing any favors for investors.

VMW shares, in fact, are down sharply today, pressured in part by negative comments from Jefferies analyst Katerine Egbert. This morning, she repeated her Hold rating on the stock and chopped her price target to $30 from $40.

Egbert notes that the company yesterday unveiled three new long-term initiatives:

• Virtual desktop
• Virtual cloud
• Virtual data center operations

“These roughly equate to enabling customers to virtualize their desktop PCs, build a hosted computing infrastructure and construct a fungible, owned compute architecture,” she writes. “These initiatives will take several years to achieve, but the new initiatives provide a framework for product development and growth.”

That all sounds encouraging (if hideously jargony), but she also notes that the company continues to lose developers, with some departing for Oracle (ORCL). Egbert wrote in a research note that she cut her price target today based on “upheaval in management, increasing attention to virtualization from Microsoft (MSFT), the need to evangelize the new initiatives and the need to sharpen execution during very uncertain economic times.”

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Mendel Rosenblum’s exit this week from VMware marks the end of an era–both for the company and virtualization software as a whole. Co-founder and chief scientist at VMware, Mr. Rosenblum brought the company to life with his wife, Diane Greene, who served as chief executive until she was fired in July. True enough, there were three other VMware founders–two of whom remain at the company–but Mr. Rosenblum and Ms. Greene were the public face of the virtualization start-up turned virtualization kingpin. They personified the Silicon Valley experience of brainy engineers outflanking the suits.

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If you are a believer in efficient markets, every now and then a hot tech stock comes along that pushes your conviction to its limits.

VMware was bought for $625 million by EMC in 2004, went public in 2007 and soon hit a market cap of $48 billion. It currently trades at about a quarter of that value.

Even the hottest stock can’t defy gravity indefinitely. Or can it?

Let us take Salesforce.com. The San Francisco software company has been orbiting the stratosphere ever since its IPO in 2004. Its shares went public at $11. Last month, the shares peaked at more than $75.

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Investors continued to shed VMware (VMW) shares today in the wake of yesterday’s firing of CEO Diane Greene and a reduction in the company’s 2008 outlook.

The company, which went public August 13, 2007 at $29 a share, immediately went soaring higher, trading as high as $125.25 on an intra-day basis last Halloween. At the time, the perception was that the company had essentially no competition in the burgeoning market for server virtualization software; Microsoft (MSFT) has since made an aggressive move into the market, as did Citrix Systems (CTXS).

Several analysts this morning actually asserted that replacing Greene with former Microsoft exec Paul Maritz should be considered a positive development for the company. “It was not a completely unexpected move,” writes Citigroup’s Brent Thill.

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Why so gloomy, VMware investors? The company’s stock drop, while likely driven more by the virtualization software maker’s newly slenderized forecasts and the resignation of its founder, seems like a slap in the face to incoming CEO Paul Maritz. And that would be a shame, since VMware is now getting one of the princes of the software world as its boss–and just in time, as it’s facing tough competition from Microsoft, where Maritz used to work.

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Right before the Christmas holidays I got a chance to catch up with Dr. Mendel Rosenblum, VMware’s chief scientist and one of the company’s five co-founders.

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