Why VMware and EMC Crashed Today

In the following video, Eric Bleeker discusses the massive VMware sell-off that also dragged down shares of parent company EMC . As Eric notes, VMware was priced near 60 times earnings before its latest earnings. Often, when companies are priced at such high levels, they can experience outsized sell-offs for relatively slight earnings misses. In VMware's case, the midpoint of its sales guidance for 2013 was $130 million below expectations. The company is expected to post more than $5.2 billion in total sales this year.

Eric notes that the largest problem isn't the total size of that sales miss, but the fact that the company has seen growth of its licensing business decline from 31% in 2011 to 8% to 11% this year. Since licensing drives the company's profitable services revenues, any slowdown signals slowing growth ahead. However, Eric further cautions that at less than 20 times its trailing free cash flow, today's VMware panic could lead to profits down the road for long-term investors. To see his full thoughts, watch the video.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." You can get a free copy for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

The article Why VMware and EMC Crashed Today originally appeared on Fool.com.

Eric Bleeker owns shares of EMC. The Motley Fool recommends VMware and owns shares of EMC and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.