Investors Light Fire Under VMware; Will it Spread to Other Virtualization Companies?

Shares of enterprise software maker VMware (NYSE:VMW) opened today at a stunning $50, a 72 percent increase over the level at which parent company EMC (NYSE: EMC) priced the subsidiary’s initial public offering yesterday. The stock fluctuated as the morning progressed but remained high, trading between $48 and $55 during the first hour of business on the New York Stock Exchange.

The 33 million shares VMWare sold at $29 per share yesterday earned the company some $957 million. Today’s run-up makes it VMware the biggest first-day gainer of 2007, according to Thomson Financial.

VMware’s software helps companies make more efficient use of their computing hardware by “virtualizing” them, so that multiple machines can appear to an application as if they are a single machine, or so that multiple applications using different operating systems can run on the same machine. At a time when microprocessors have grown so powerful that businesses typically don’t exploit their full capabilities, virtualization can allow companies to recoup more of their investment on their IT infrastructure. “The machines available today have so far outstripped what people do with them that they’re looking for ways to more heavily utilize what they paid for,” says Dan Kusnetzky, an independent software analyst who consults with companies about virtualization and writes a blog on the subject for ZDNet.

But while VMware is successfully capitalizing on the buzz around virtualization, it’s far from the only company offering such technology. “Everybody has gotten behind VMware because they have captured the word ‘virtualization’ and made it equate to what they do in people’s minds,” says Kusnetzky. “But I think some investors don’t really understand all of the technology and are not aware of where VMware’s products fit and where they don’t.”

VMware’s software is a good solution for companies looking to consolidate the workload onto a smaller number of machines, Kusnetzky advises. But “if they’re looking for agility or the ability to move workloads from machine to machine, or if the goal is raw performance or absolute scalability, then the products from VMware are not the ones to select,” he says. IBM’s Tivoli system, Novell’s Orchestrator, and XenSource’s new open-source Xen Enterprise v4 are more appropriate alternatives for those needs, Kusnetzky suggests.

Investors’ frenzy over VMware will eventually spill over onto these other companies, Kusnetzky predicts. “As soon as people start to become aware of companies like VMware they will start to run into the 60 or 70 other companies” that offer virtualization products, says Kusnetzky. “My suspicion is this is going to increase the interest across the space.”

Wade Roush is a freelance science and technology journalist and the producer and host of the podcast Soonish. Follow @soonishpodcast

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