VMware shares poised to lose rich valuation

* VMware P/E ratio double that of Microsoft, Oracle

* Analysts see VMware shares falling as competition rises

* Only 2 of 31 analysts who follow VMware say 'buy'

By Jim Finkle

BOSTON, July 6 (Reuters) - VMware Inc (VMW.N) could lose its rich share valuation as a new product from Microsoft Corp (MSFT.O) and potentially more competition from Oracle Corp (ORCL.O) threaten its lead in the virtualization market.

VMware shares trade at about 26 times the average Wall Street forecast for next year's earnings, according to Reuters Estimates. That is roughly twice as expensive as Microsoft, the world's biggest software maker, and Oracle, the third.

Analysts say VMware shares could be ready for a sell-off if its quarterly results later this month, or its outlook, miss expectations, with Microsoft preparing to ship in July a souped up rival to VMware's flagship product.

Some warn that VMware has yet to factor in the competitive threat and only two of 31 Wall Street analysts who follow VMware stock advise investors to buy it at current prices.