15% Upside to VMware from Slower Margin Decline
VMware (NYSE: VMW) competes with Microsoft (NASDAQ:MSFT) and Citrix (NASDAQ:CTXS) in the virtualization market, which it leads with around 46% share globally. We currently have a Trefis price estimate of around $75 for VMware’s stock, about 4% below the current market price of around $79.
Trefis members have created forecasts for one key driver of VMware’s stock over the last week: (1) Gross Margin as % of Sales. The members’ forecast suggest that Gross Margin as % of Sales will trend above the Trefis forecast.
We estimate that Virtualization Software constitutes around 90% of the $75 Trefis price estimate for VMware’s stock. Hence the stock is very sensitive to Gross Margin as % of Sales. Below is the chart showing recent estimates created by Trefis members in detail.
The average of forecasts for Gross Margin as % of Sales created by Trefis members indicated a projected decrease from around 86% in 2010 to around 85% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of a decrease from 82.5% in 2010 to 80% by the end of the Trefis forecast period. The member estimates imply an upside of 15% to the Trefis price estimate for VMware’s stock. In the past, Gross Margin as % of Sales has decreased from around 90% in 2005 to 82% in 2009.
You can drag the forecast trend-line above to express your own view, and see the sensitivity of VMware’s stock to Gross Margin as % of Sales.