VMware, Inc.

VMware, Inc. (NYSE: VMW) is a virtualization technology company that works with x86 server-based computing to decouple application software from the underlying hardware. As a result, VMW's software offers customers embarking on digital transformations a flexible digital foundation. It derives its revenue from License, Subscription, SaaS services, software maintenance and professional services.

Why Should Investors Book Profit?

• Weak Liquidity Profile: The company's current ratio at the end of FY22 is 0.83x, compared to the industry median of 1.86x. This implies relatively lackluster liquidity profile against the industry median.
• Dependence on Third-Party Providers: VMW is dependent on Third-party suppliers for data center 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.
• High Cash Conversion Days: Compared to the industry, the company has a long Cash Conversion Cycle (Days), meaning that it takes more days to convert its inventory to cash. In FY21, its Cash Cycle was 73 days, compared to an industry median of 34 days.

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 share price has declined 14.36% in the past nine months and is currently leaning towards the lower band of the 52-week range of USD 107.57 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 100.80.

Considering the company's weak liquidity profile, long cash cycle, current valuation, and associated risks. We recommend a "Sell" rating on the stock at the closing price of USD 111.01, down 3.91% as of April 06, 2022.                    

Three-Year Technical Price Chart (April 06, 2022). Source: REFINITIV, Analysis by Kalkine Group

* 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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