When 50% growth just isn’t good enough

Yesterday, VMware announced earnings.  The company makes virtualization software that can be used to maximize computer hardware by allowing you to run multiple operating systems on a single set of hardware.   It can offer additional gains by allowing a company to house all of its hardware in remote locations where rent may be cheaper, power may be more affordable and IT labor and support may be more cost effective.

The company’s earnings were, by most measures, astonishing.  Net income was up 152% year-over-year, revenue was up 80%.  Earnings came in $0.02 ahead of estimates and projected revenue growth was pegged at 50% for the coming year.

The result of all this?  The stock dropped over $25/share, losing ~30% of its market cap in one day.  $10 billion dollars…poof.

The reason?  Revenues of 412 million were 5 million short of expectations.  Just over 1% off.  Revenue growth projections for next year were expected to be 55-57% instead of the 50% that appear to be more realistic. 

Its all a bit crazy to me.  Are investors playing so aggressively that such minor deviations from their estimates are completely unacceptable?  This company shed 10 billion in market cap yesterday because the market was expecting something slightly different than what actually happened.  This sort of volatility can’t be healthy in the long run…