VMware stock has plunged by more than 30 percent after disappointing results from the EMC-controlled company.
The firm has been hit hard by the challenges from vendors such as Microsoft and Citrix who are expanding into the field of virtualisation that VMware has long dominated.
VMware revenue is still growing, increasing 80 percent in the fourth quarter of 2007 over the previous year, and EMC projects revenue to grow another 50 percent in 2008; but both of those numbers fell short of analyst expectations.
After a wildly successful IPO last August, VMware is "now likely to be a 'show me' stock," UBS analyst Heather Bellini wrote in a note to investors.
EMC CEO Joe Tucci called the price drop a "hell of a reaction," according to the Boston Globe, saying it's a young stock that can be expected to have some volatility.
VMware remains a major presence in the x86 server virtualisation market with more than 100,000 customers. But Microsoft is taking a run at VMware's market leadership, last week announcing the acquisition of start-up Calista Technologies and other strategies to improve its virtualisation offerings. IBM has announced PowerVM virtualisation for its own System i and System p servers.
Citrix is also attacking the market following its acquisition of XenSource.
Hardware advances will also force VMware to find new ways to differentiate itself in the coming years, as Intel and AMD are building virtualisation capabilities direct into the x86 processor.