VMware’s stock (NYSE: VMW) has rallied 32% since late March (vs. about 44% for the S&P 500) to its current level of $139. This is after falling to a low of $106 in late March, as a rapid increase in the number of Covid-19 cases outside China spooked investors, and resulted in heightened fears of an imminent global economic downturn. The stock is currently about 14% below its February 2020 high of $162. Are the gains warranted or are investors getting ahead of themselves? We believe that the stock recovery is justified, and think the stock price is likely to increase marginally from its current level in the near term. Our conclusion is based on our detailed comparison of VMware’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.
How Did VMware Fare During 2008 Downturn?
We see VMW’s stock declined from levels of around $74 in October 2007 (the pre-crisis peak) to roughly $17 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 77% of its value from its approximate pre-crisis peak. This marked a drop that was higher than the broader S&P, which fell by about 51%.
However, VMW’s stock recovered strongly post the 2008 crisis to about $35 in early 2010 – rising by about 104% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.
In comparison, VMW’s stock lost 35% of its value between 19th February and 23rd March 2020, and has recovered 32% since then. The S&P in comparison fell by about 34% and rebounded by about 32%.
Is The Recovery Warranted & Can We Expect Further Gains?
The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely quieted investor concerns about the near-term survival of companies. While Covid cases are still rising in many parts of the world, the planned opening in phases of U.S. and European cities is also giving investors some confidence that developed markets have put the worst of the pandemic behind them.
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending, which would lead to lower demand for software, and web services affecting VMware’s revenues. That said, the company is also well poised to benefit from the growing number of people globally who are working from home thanks to its portfolio of software as well as services aimed at remote collaboration. While the company has already withdrawn its guidance for full-year 2020, we believe the company’s Q2 results in will confirm a hit to its revenues.
However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to boost market expectations. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become more important in finding value.
As the global lock downs are lifted gradually, consumer demand is expected to pick up. Though the stock has recovered how much it lost between February and March 2020, with investors’ focus now primarily shifting to FY 2022 numbers, we believe expectations for healthy revenue and margin growth is likely to drive the stock slightly higher from its current level of $139. As per VMware’s Valuation by Trefis, the company’s fair price works out to about $156.
So, while VMware seems to have a modest upside from its current level, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.
For further insight in to the Software industry, you can see a comparative analysis of SAP vs. Oracle.