VMware (NYSE: VMW), a cloud computing and virtualization technology company, has seen its stock underperform considerably in recent years, declining by around 5% from the March 2020 lows, compared to the broader Nasdaq-100, which remains up by about 75% over the same period, even after recording a big sell-off this year. The stock has gained a mere 8% over the last five years, compared to the Nasdaq which is up by over 2x. The underperformance in the stock comes as the company faces some challenges. Businesses have been increasingly moving their computing needs to public clouds, hurting VMware’s VMW virtualization offerings in recent years. Moreover, the company also paid out a sizable special dividend of $27.40 per share late last year, following Dell’s move to spin off its VMware stake, and this also likely resulted in some selling pressure in the stock.
However, there appear to be multiple catalysts for growth. The company has been repositioning itself to cater to the hybrid cloud model which is increasingly popular with large businesses. With the hybrid model, businesses use public cloud services such as Amazon Web Services or Google Cloud, while retaining some operations on their private on-premise data centers. VMware’s hybrid cloud offerings include Tanzu - an application platform, and VMware Cloud, which is a cloud infrastructure service. VMware’s offerings are also cloud platform agnostic, working well with multiple cloud vendors. Cloud-related sales are picking up nicely, with Subscription and SaaS revenues for FY’22 (fiscal year ended January) coming in at about $3.2 billion, up 23% versus last year. Although this only accounted for about 25% of the company’s total revenue for the year, it expects this to exceed 40% of its total revenue in its fiscal year ending in January 2025. These revenues are largely recurring and should help VMware’s overall revenue visibility while potentially helping margins in the long run. VMware also has a large base of existing customers that could help it drive cloud sales going forward. The spin-off from Dell will also give the company more independence with its operations and longer-term strategy, while eventually unlocking some value for shareholders.
VMware stock trades at just about 14x consensus FY’23 earnings, which is reasonable in our view given the company’s longer-term prospects and thick margins. We value VMware stock at about $145 per share, which is about 40% ahead of the current market price. See our analysis on VMware valuation : Expensive or Cheap for more details on what’s driving our price estimate for the company. Also, see our analysis of VMware Revenue for a closer look at the company’s key revenue streams and how they have been trending.
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