VMware, Inc.

VMW Details

VMware, Inc. (NYSE: VMW) engaged in developing and implementing virtualization technologies with x86 server-based computing, decoupling application software from the underlying hardware. As a result, VMW's software provides a versatile digital basis for customers embarking on digital transformations. It derives its revenue from License, Subscription, SaaS services, software maintenance and professional services.

Latest News:

• Enhanced Collaboration with HCL: On February 28, 2022, VMW and HCL Technologies, a global technology company, announced the expansion of their collaboration to supply integrated solutions to service providers all over the world. HCL will add VMware Telco Cloud – 5G Core and VMware Telco Cloud RAN to its Cloud Smart portfolio of services driven by VMware technology. HCL will also establish a dedicated lab to make it easier for customers to install these solutions across their networks.

FY22 Results:

• Growth in Topline: The company reported a YoY growth of 9.21% in total revenue to USD 3.53 billion in FY22 (ended January 28, 2022) from USD 3.29 billion in FY21 (ended January 29, 2021), driven by YoY growth of 10.58% in Total license and subscription and SaaS.
• Reduction in Profitability: In FY22, VMW's net income decreased to USD 586 million from USD 791 million in FY21.
• Cash and Debt Position: The company had USD 36.33 billion in cash and cash equivalents (including short-term investments) as of January 28, 2022, and total debt of USD 12.67 billion.

Key Risk:

• Dependence on Third-Party Providers: VMW is dependent on Third-party suppliers for data centre space, equipment maintenance, and other colocation services for its subscription and SaaS solutions. Any failure on the contractual obligation by these third parties may lead to loss of reputation distrust among customers and endanger its ability to sustain and develop subscription and SaaS products.
• Dependence on Dell: VMW's prospects are significantly dependent on its relationship with channel partners. For example, in Q3FY22, revenue arising from its relationship with Dell represented 37% of the total Q3FY22 revenue. Hence, any cancellation or alteration in its contractual relationship with Dell could negatively impact its financials.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:

VMW's stock price has fallen 9.64% in the past month and is currently leaning towards the lower end of its 52-week range of USD 108.80 to USD 141.09. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 141.63.

Considering the correction in the stock price, enhanced collaboration with HCL, strong margins, decent topline growth, associated risks, and current valuation, we recommend a "Buy" rating on the stock at the current price of USD 116.69, down 1.23% as of February 28, 2022, at 12:53 PM ET.

Three-Year Technical Price Chart (as on February 28, 2022, at 12:53 PM ET). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Datto Holding Corp.

MSP Details

Datto Holding Corp. (NYSE: MSP) provides cloud-based software and technology solutions to small and medium businesses via the managed service provider (MSP) channel (SMBs). Unified Continuity, Networking, and Business Management software solutions are among the company's cloud-based products.

Latest News:

• Key Acquisition: On January 20, 2022, MSP announced the acquisition of threat detection and response startup Infocyte, increasing Datto's security capabilities to defend, identify, and respond to cyber threats identified on endpoints and in cloud environments. Infocyte is a Leader in Endpoint Detection and Response (EDR) technologies and Managed Detection and Response (MDR) services, with headquarters in Austin, Texas. Infocyte's patented technologies continuously collect and correlate data from endpoints to identify potential attacks. It was founded by threat intelligence experts from prominent cybersecurity organizations within the US military.

FY21 Results:

• Double-Digit Growth in Topline: The company reported YoY growth of 19.25% in total revenue to USD 618.66 million in FY21 (ended December 31, 2021) from USD 518.79 million in FY20, attributable to 18.96% growth in the Subscription segment, driven by an increase in revenue from Unified Continuity and Endpoint Management cloud-based offering and improvement in sales from Business Management and Networking cloud-based offerings.
• Improvement in Profitability: In FY21, MSP's net income surged to USD 618.66 million from USD 518.79 million in FY20.
• Cash and Debt Position: The company had USD 226.77 million in cash and cash equivalents as of December 31, 2021, and no outstanding debt.

Key Risk:

• Dependence on Subscription Services: Revenue from Subscription services accounted for 93% of the MSP’s total revenue in FY21. Thus, any decline in the new or renewed subscription may harm the company’s financials.
• Voting Concentration Risk: As of December 31, 2021, Vista owned ~69.5% of MSP’s common stock thus gaining substantial control over its operations. This constrains the ability of other shareholders to influence corporate decisions.

Outlook:

Q1FY2022 and FY22 Outlook (Source: Earnings Release, February 23, 2022)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:

MSP's stock price has fallen 12.99% in the past nine months and is currently leaning towards the lower end of its 52-week range of USD 20.76 to USD 28.26. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 28.53.

Considering the correction in the stock price, inorganic growth initiatives, robust financial performance, strong margins,  positive outlook, associated risks, and current valuation, we recommend a "Buy" rating on the stock at the current price of USD 23.44, up 0.51% as of February 28, 2022, at 02:29 PM ET.

Three-Year Technical Price Chart (as on February 28, 2022, at 02:29 PM ET). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.