At the current price of around $152 per share, we believe VMware’s stock (NYSE: VMW) has the potential for good growth in the near term. VMW stock has been flat since the end of FY 2019 (ended January 2019) compared to the S&P500 which has increased by 49% in the same period. Revenue rose in FY 2021 (ended January 2021) as the Covid-19 pandemic pushed individuals and organizations toward digitalization and cloud offerings. The revenue growth was led by the Subscription and SaaS segment which grew by nearly 38% compared to the previous year.
On July 15th, 2020 Dell filed a form 13D/A with the SEC disclosing that they were exploring a spin-off of their 81 percent equity ownership in VMware. The company has over the months reiterated that there won’t be any changes in the business partnership between the companies. In February 2021, the VMware interim CEO Zane Rowe said the company is “making progress” on its potential spin-off from Dell Technologies and believes it could be value-enhancing to VMware and its stockholders. The spin-off is not expected before September 2021 as Dell is seeking to qualify it as tax-free for income tax purposes. Since the details on the potential spin-off are still under evaluation, how it will impact VMware is yet to be known.
Over the recent years, the company has seen earnings rise while its P/E multiple has also increased. Our dashboard ‘Buy or Sell VMware’s Stock?‘ provides the key numbers behind our thinking.
VMware’s revenue rose from $9.6 billion in FY2019 (ended January 2019) to $11.8 billion in FY2021 (ended January 2021). Net income margin increased from 16.5% in FY2019 to 17.5% in FY2021. On a per share basis, earnings went up from $3.99 to $4.80 while the company saw a 1.8% fall in shares outstanding.
During the same period, the P/E multiple fell from 37.5x to around 28.1x. The P/E improved slightly in FY2022 and is currently around 31.1x.
Where Is The Stock Headed?
The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This, in turn, promoted digitization of organizations with a push for remote working. VMware saw revenues increase by 9% to $11.8 billion for FY 2021 while GAAP operating income rose to $2.4 billion, up by 66% y-o-y. Earnings fell to $4.90 compared to $15.37 in the previous year. The earnings were very high in FY 2020 (ended January 2020) as a discrete tax benefit of $4.9 billion was recognized with a deferred tax asset due to an intra-group transfer of some intellectual property rights to their Irish subsidiary.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which 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 become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. In FY 2022 we expect VMW revenues to rise to $12.7 billion, up 8.3% y-o-y. Further, its net income is likely to rise to $2.1 billion, increasing its EPS figure to $5.03, which coupled with the P/E multiple of 34.1x will lead to VMware’s valuation around $172 per share, up by 13% from the current market price.
While VMware’s stock has an upside, looking for more reasonably valued software stocks with big room to grow? Check out our theme on Mid-Cap SaaS Stocks.