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We See Value in VMware

Investors have an opportunity to benefit from the rapid adoption of cloud-based resources.

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VMware’s (VMW) strong fiscal 2020 second-quarter results included 12% year-over-year revenue growth and non-GAAP earnings per share of $1.60, both exceeding consensus expectations. A weaker outlook for license-based sales led to lower-than-expected third-quarter revenue guidance from management, but VMware kept its companywide revenue target for fiscal 2020 intact. We expect VMware’s massive footprint across the networking environment to benefit from the technologies it’s gaining, and we are maintaining our $194 fair value estimate. We believe this 4-star stock provides an opportunity for investors to benefit from the rapid adoption of cloud-based resources.

The narrow-moat company said it has reached definitive agreements to purchase Pivotal Software, a vendor offering a developer platform for container-based workloads, for a total enterprise value of $2.7 billion and Carbon Black, an endpoint security vendor, for an enterprise value worth $2.1 billion. The total cash outflow from the deals is $2.7 billion, supported by VMware’s cash balance and access to short-term borrowing. We believe these acquisitions support VMware’s intention to move from being an infrastructure player into a wider solutions provider for applications across various cloud and device ecosystems. While we are slightly apprehensive about the decision to acquire instead of remaining partners with companies that have underperformed recently, we envision VMware gaining from the enablement of secure application deployments across hybrid cloud ecosystems.

Mark Cash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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