VMware, Inc.

VMW Details

VMware, Inc. (NYSE: VMW) is a majority-owned subsidiary of Dell Technologies Inc. (Dell) engaged in developing and applying virtualization technologies with x86 server-based computing, separating application software from the underlying hardware. In addition, it offers several products that enable businesses to manage IT resources across private clouds and multi-cloud, multi-device environments. As of September 16, 2021, the company's market capitalization stood at USD 59.42 billion.

Appointment of CTO: On September 08, 2021, VMW announced the appointment of Kit Colbert as its Chief Technology Officer (CTO). Prior to this appointment, he has held multiple positions with the company since 2003. In this new role, Mr Colbert has been tasked with setting the technical vision for VMW and transitioning it to a cloud and subscription-centric R&D organization.

Q2FY22 Results: The company reported YoY growth of 9.15% in total revenues to USD 3.14 billion in Q2FY22 (ended July 30, 2021) compared to USD 2.88 billion in Q2FY21 (ended July 31, 2021). The Services segment, which accounted for 51.75% of the total revenue in Q2FY22, reported YoY growth of 6.49%. Net income for Q2FY22 reduced to USD 411 million from USD 447 million in Q2FY21. As of July 30, 2021, the company had cash & cash equivalents (including short-term investments) of USD 5.94 billion and total debt of USD 5.04 billion.

Key Risks: VMW's prospects are significantly dependent on its relationship with channel partners. For example, in Q2FY22, its top distributor accounted for ~10% of its total revenue. In addition, revenue arising from its relationship with Dell represented 36% of the total Q2FY22 revenue. Hence, the loss of such a vital distributor or any cancellation or alteration in its contractual relationship with Dell could negatively impact its financials.

Outlook: In Q3FY22, VMW expects a YoY growth of 9% in total revenue to USD 3.12 billion (including Subscription & SaaS and License revenue of USD 1.47 billion), along with non-GAAP EPS of USD 1.53.

For FY22, its total revenue is estimated to be USD 12.80 billion (Subscription & SaaS and License revenue of USD 6.27 billion), thus realizing YoY growth of 9%. It also expects to incur capital expenditures of USD 380 million during the year and earn diluted non-GAAP EPS of USD 6.90.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

VMW Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: VMW's share price fell 10.87% in the past three months and is currently at the lower-band of the 52-week range of USD 126.79 to USD 172.00. The stock is currently trading below its 50 and 200 DMA levels, and its RSI Index is at 29.92. We have valued the stock using the EV/Sales multiple-based relative valuation methodology and arrived at a target price of USD 154.73. Considering the correction in the stock price, current valuation, and associated risks, we recommend a "Hold" rating on the stock at the closing price of USD 139.89, down 1.42% as of September 16, 2021.

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.

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