VMware Inc. (VMW)

As we promised and per your request, we’ve finally picked up our next stock from the tech sector. Probably most of you were expecting us to revise companies like Microsoft, Facebook, or Apple, but we prefer to dig deeper and look for neglected companies that in the current situation have a lot of future potential.

The tech sector has been on the rise lately, obviously with the tech giants leading the way, but it is highly likely that those tech giants are already a bit overvalued, which could trigger some significant drops in their stock prices. However, the tech sector’s potential is huge, due to many reasons that we’ll be covering in this article. So without getting into more details in this intro — we present you our analysis for VMWare Inc.

Most of you are probably familiar with VMWare and its services — the company offers cloud computing solutions worldwide. The company was founded in 1998 and has been one of the major players in the cloud computing and virtualization market. Currently, it is most widely known for its Hypervisors, amongst other virtual computing services. In the world of virtualization, VMWare is holding a 42% share of the market for Q1 this year. Although cloud computing is dominated by AWS (Amazon) and Azure (Microsoft), VMWare has a nice market share and is well known for its solutions. But to better understand why such a company can be extremely valuable, we have to look at the current situation in the world and what we can expect in the following years.

Technology has been evolving non-stop, and there are no signs of slowing down. From new projects appearing daily (applications, web-based products etc.) to more advanced things like Artificial Intelligence, the world of technology is on the rise. It will continue to develop and improve in the upcoming years. Another boost to that would be the possible outcomes from the COVID-19 pandemic, which triggered a lockdown throughout half the world.

During this lockdown period, a lot of companies were forced to work from a distance and not have their employees situated in an office — and most of them saw that this method of work is not only possible but preferable.

Considering the costs of renting a huge building for a 300 employee company, can be quite overwhelming, but distance working saves up on those costs, so we expect to see a lot of companies abandoning their workspaces and moving to a distance working environment. It would be a similar approach as companies moved from extremely big and costly to maintain server rooms to cloud services. This incoming change in the methodology of managing and working within a company will most certainly have its’ effect on the tech sector. Obviously, those companies will need a various range of software products in order to organize the workflow properly, which means that we’ll most likely see a boom in software engineering and creation of new applications or other types of software products that could ease this transformation. This will lead to more cloud usage and other virtualization solutions, and here is where VMWare comes in to play. Considering this massive change that is expected to happen gradually which for us would be the major booster of stock prices for companies operating in that field, let’s dig in into more details about VMWare itself and why for us it is a good pick with a lot of potential, by checking the possible pros and cons.

Pros:

• Obviously, one of the biggest pros for picking up this company is its huge market share in virtualization and its active participation in the cloud computing market. We’ve already outlined the reasons why we think the usage of this services will continue growing in the upcoming months and years, but it is also good to mention that according to multiple researches application virtualization is expected to experience the most growth among virtualization technologies with adoption expected to grow from 39% to 56% by 2021 and probably beyond that in the following years. Storage virtualization is already relatively common, but there is still a lot of room for improvements and new solutions, so this market has huge hidden potential. Although 90% of companies are already on the cloud, the global cloud computing market is expected to reach $623.3 billion by 2023, while the market size in 2018 was a mere $272 billion. Although privacy and security are the two main roadblocks for full cloud adoption, we believe that those issues will be solved sooner rather than later, and cloud computing will become pretty mainstream.
• Optimisation of costs for mid to big companies is the main reason to transfer from regular server technologies to cloud services. Not only that, but as we expect for a lot of companies office buildings might become obsolete, giving an additional boost to the usage of different types of softwares and internal architectures, which will inevitably affect the virtualization market. After all, for big enterprises, the sole goal is to constantly optimize their spendings without affecting the quality of the product and workflow, so cloud computing and virtualization in any form become a significant tool in that venture.
• Of course, we have to look through the economic data for the company. Currently, the stock is about 18.8% undervalued, giving us a good room for the placement of a couple of buy orders in the following months. Although experts set a fair value for the stock around $173.31 based on the future expected revenue, we believe the stock has a lot more potential, and the $200 mark will not be just a dream.
• For the last 5 years, the company earnings growth has outpaced the industry and the overall market by more than 20%. Only in the last year, the earnings growth was 486%, which is huge, considering that the earnings in the industry grew by an average of 10%. Our projections are that the company’s earnings will continue to grow by the end of 2020 and significantly grow in 2021.
• In the long run, it is expected that the assets will cover most of the liabilities of the company. This is a good indication for the health of the company and could lead to a lot of free cash that could be reinvested in working on more advanced and needed solutions.
• The famous Zacks index gives the company a valuation of 3 (HOLD), meaning that the stock price’s potential to rise in the next 1 to 3 months is pretty high. Their average target price is around $174, which is potentially the fair value for the stock.
• The revenue of the company is forecasted to grow by 9.65% per year. Total revenue has been growing steadily since 2016, and we believe that this trend will continue.
• The company is expected to publish its earnings report on the 27th of August. The estimate is $145 per share, but we think it is highly likely that this number will be outpaced and we’ll see also a significant increase in the revenue considering the possibly higher usage of services during the lockdown period
• Most investment firms are giving the stock a status to maintain or upgrade it from Hold to Buy, expecting the stock to outperform the market. In 2020 so far, only Jefferies has downgraded the stock from Buy to Hold status. Deutsche Bank, Bernstein, Wells-Fargo are all maintaining their status of Buy.

Cons:

• Probably the biggest con which could slow down the company’s evolvement is their debt size, which is currently pretty big. Over the past 5 years, the equity to debt ratio has increased significantly, but so far, the debt is well covered by the operating cash flow. With the expected increase in revenue, we believe that the debt and other liabilities will shrink further against the equity.
• Another con that gives us a bit of red light is the insider trading volume in the past few months. A lot of individuals sold shares in the past 3 months; this can not be taken as a bad sign as we don’t know the purpose of that sale. Still, with the future forecasts for the company and their growth, we expect to see fewer insider sell-offs and a possible increase in buying in the upcoming months, so this risk will be mitigated, and the trading will be balanced.
• Something that could be considered an issue is the ownership of the company. Almost 81% of the company is owned by Dell Technologies Inc., which links two companies together, and possible negative results from one of the companies could affect the other. However, Dell has been a quite stable company in the last years, so we don’t expect to see negative results there, but we should keep that in mind.

We think we’ve managed to cover most of the pros and cons and explain our choice of this stock, however, as usual, we recommend you to do additional research and more in-depth analysis. So far, we’ve covered briefly the financials of the company as well as the expected development on the overall market, which are our main points that support the Buy status we are giving to this stock.

Now it is time to briefly make technical analysis in order to complete our overview.

Technical analysis:

VMWare Inc. (VMW) — Weekly chart

On the weekly chart above, we can see that the stock price has skyrocketed since March this year, going from a bottom of around $85 to the current $140 price levels. At this point, we can notice that overall, since April last year, the stock has been moving in a downtrend fashion marked by the red line. However, at the same time, we see that the price is above the 200 MA, which often does not act as a support or resistance level. Not only that, but the 200 MA is aligned with the Weekly Support Area around $135 price levels.

We might see a small drop in the stock price in the upcoming weeks to those levels before the trend movement reverses, and the price makes another swing on the upside.

We don’t expect the weekly support area and the 200 MA line to be broken, and we’ll most likely see a break of the red line indicating the current downtrend. If that happens and the stock surpasses the $145 mark, we believe that it will easily go to the next weekly resistance zone, which would be our initial target — at around $155. Depending on the strength of the weekly resistance, we might see a small correction down, or if we see a break of that zone, the stock price could easily rise to $180. We believe that the earnings could trigger this upside movement, so we’ll make sure to position ourselves on the market before the earnings date. As usual, we’ll use a DCA approach since the average price of entry could potentially go around $137–138, and this would be on the lower range of expected price. Keep in mind that it is possible that the stock price will remain quite stagnant as it is now until the earnings date, meaning probably by the end of August.

With this technical analysis, we conclude our overview of VMWare Inc. and the potential that the stock holds. Although we missed some of the upside movement which, as mentioned, started in March, we believe there is a lot more growth potential ahead, and a target at $200 per stock is not just a dream but an achievable target in the next 1–2 years maximum. We hope this analysis will be a good starting point for you and a base of more in-depth research, which we advice you to do. If you have any questions or concerns, do not hesitate to contact us. Also, for further clarification of the information provided in this article — we are available.

Our team wishes you a lot of profitable investments and do not forget to enjoy life as well! Good luck to all and be safe!

⛔ Risk Warning: Investing in financial assets involves risk and is not suitable for all investors; do not risk more money than you can afford to lose. Please make your own research to make sure the product is right for you.