VMWare (NYSE:VMW) shares are a third off of their highs today after the stock hit $84.60. The company managed to lose $15 billion in market cap in only ten trading days amid a steep market downturn - particularly in tech. The move has many investors wondering whether or not this company is really worth the $40 billion market cap that it has now.

VMWare posted revenues last quarter of $357 million, which was up 88% over the same quarter last year. Meanwhile, earnings per share tripled to $0.18 per share. However, does this justify a valuation of $40 billion? Well, assuming that VMWare will raise its earnings 100% for the next five years and then 50% for another 5 years after that, we can discount all this future cash flow to a present value of $31 billion.

VMWare also faces significant competition. Microsoft recently announced its own initiatives to include virtual desktop tools with its operating system. And with billions of dollars at their disposal, Microsoft will likely be able to promote their product substantially more than VMWare.

In the end, it will be interesting to see how fast VMWare is able to grow their revenues and earnings. Whether or not this valuation is justified remains to be seen, but VMW is a stock that is definitely worth watching!

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