After climbing as high as 8% for the day, VMware (NYSE: VMW) shares are holding on to a gain of just over 2% in late day trading. Investors continue to digest rumors that parent company Dell (NYSE:DELL) will spin-off its $50 billion stake in VMware.
The move is perceived as being a potential catalyst for both stocks. However it’s clear that some analysts believe that VMware could benefit significantly from being on its own.
The analyst firm Piper Sandler issued commentary on June 23 that speculated VMware could have a price of over $200. Not only would that be about a 30% increase from its current level; a price of $200 would be a 10% increase from the stock’s 52-week high.
It would also put the stock within shouting distance of its all-time high that the company achieved in May 2019. That was about the time when investors became concerned about the company’s appetite for growth through acquisition.
A Leader in the Hybrid Cloud Market
For those who are unfamiliar with VMware, the company is becoming a leader in the “hybrid” cloud market. Cloud computing is a growing market. Cloud computing allows customers to rent computing horsepower rather than invest in their own. This is particularly true of storing and accessing data and programs. Cloud is just another way of saying these items are accessed via the internet instead of residing on a local computer’s hard drive.
Cloud computing has been made popular by companies like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) who offer public cloud services. In a hybrid model, a company combines a public cloud network with a company’s own private network. And this is a market that continues to grow with a market value of around $62 billion.
Open source technology is at the core of the hybrid cloud model. VMware realized that it had to respond to the acquisition of Red Hat by IBM (NYSE:IBM) in 2019. This $34 billion acquisition made IBM the undisputed leader in what is known as open source container applications. It also gave IBM access to Red Hat’s OpenShift Kubernetes platform.
VMware’s response was to purchase Pivotal Software for $2.7 billion. According to CEO Patrick Gelsinger, the acquisition gave VMware better assets at a lower cost. Acquiring Pivotal is at the core of VMware’s Kubernetes strategy called VMware Tanzu, which will give customers more options to build and deploy applications on Kubernetes using different development platforms.
However, VMware did not stop there. They also acquired Bitnami for its packaged application catalog and Heptio for its extensive experience with Kubernetes. They also purchased Carbon Black for an additional $2.1 billion.
The Company is Beginning to Exercise a Pivot
The outbreak of the Covid-19 pandemic came just as VMware was beginning to rally from a 25% decline after hitting its 52-week high in May 2019. The company had just gone through this acquisition spree but was beginning to show that it was ready to deliver growth.
The proof of this is evident in what has happened to VMW shares since the selloff. The stock has moved steadily higher and is virtually even for the year.
Some of that growth is due to a stellar first-quarter earnings report that saw the company deliver $2.73 billion in revenue (a 12% increase). And on the bottom line, VMware posted adjusted net income of $1.52 per share, which blew away expectations for $1.20 per share.
One of the keys for the company was growth in its subscription and software-as-a-service (SaaS) revenue which climbed to $572 million (a 39% increase).
Although VMware was less affected by the Covid-19 pandemic than other companies, they have withdrawn its full-year guidance. The company did however re-issue guidance for the second quarter. The company is forecasting revenue of $2.8 billion and an adjusted earnings per share (EPS) of $1.24.
VMware’s goal is to get its existing 600,000 vSphere customer base to adopt container technology in addition to VMware’s vSphere virtualization platform. The initiative, called Project Pacific, unites vSphere with Kubernetes.
The Bottom Line on VMware Stock
Although Morgan Stanley (NYSE:MS) suggests that Dell and VMware may be better together, it seems pretty clear that VMware would have little trouble standing on its own two feet. With all that said, Dell would not be spinning off VMware until next year. As the Wall Street Journal reports, Dell would lose its preferred tax treatment if it spun off the company prior to September 2021.
VMware does not pay a dividend, so any investment in the stock is a pure growth move. But with analysts becoming more bullish about the stock, VMW stock looks like a sneaky good play in the tech sector that could quietly deliver a solid gain.
Companies Mentioned in This Article
20 Stocks Wall Street Analysts Love the Most
Every trading day, between 500 and 800 new recommendations and research reports are issued by sell-side equities research analysts. There are between 300 and 500 brokerages and research houses that issue ratings, price targets and recommendations and more than 5,000 securities around the world that regularly receive coverage from research analysts.
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