An Opportune Time To Get Into VMware
With VMware’s (NYSE: VMW) planned spin-off from Dell Incorporated (NYSE: DELL) lurking around the corner its earnings results are more important than ever. Dell currently owns 81% of the company and is planning to spin it off as an independent unit in the fourth quarter of the year. The deal is worth an estimated $11.75 billion to shareholders and will be paid in the form of a special dividend later this year. Upon completion of the deal, VMWare will be free to pursue growth avenues aside of its work with Dell while Dell will continue to leverage the strengths of the company. In our eyes, this is a win-win for both companies and for shareholders.
“Our customers are evolving their strategies from a ‘cloud first’ to a ‘cloud smart’ philosophy where they are picking the right clouds and cloud services for the right workload, and turning to a multi-cloud environment,” said Raghu Raghuram, VMware CEO. “We are delivering the multi-cloud platform for all applications, enabling the digital innovation and enterprise control that our customers need to accelerate their businesses today and in the future.”
A Good Quarter Wasn't Good Enough For VMware Investors
VMware had a good fiscal second quarter but one that failed to impress its investors. The $3.14 billion in consolidated revenue is up 9% over last year and beat the consensus by 100 basis points. While better-than-expected, 100 basis points isn't much to brag about, and YoY growth is slowing. Year-over-year growth slowed about 50 basis points from the previous quarter and is the 2nd slowest pace in years but there are the comps to consider. The company posted a strong 17.88% growth in the previous year which helps to put this year's figures in perspective. On a two-year basis, the company's revenue is up 28% and underpinned by the strength in its growth segments.
The company's growth segments, subscriptions, SaaS, and licenses, grew 12% compared to the company’s total of 9%. Within that, the subscription and SaaS services grew by 23% but margins came under pressure anyway. Both the gross and operating margins fell short of last year's levels resulting in a slight decline in earnings. Even so, the margin contraction was less than expected and produced better than expected earnings. The GAAP EPS of $0.97 beat the consensus by $0.07 while the adjusted earnings of $1.75 beat the consensus by $0.11.
The Analyst Like VMware And So Do We
The analysts rank VMware at hold with a bias towards buy with a noteworthy trend in the consensus target as reported by Pricetargets.com. The consensus price target has been creeping higher over the past few months and edged higher again today. Analysts at Stifel Nicolaus maintained their buy rating but upped the price target To $185, just shy of the high price target of $190. This compares to the consensus figure of $174 and implies an upside of nearly 30%.
The Technical Outlook: Short-Sellers Helped VMWare Move Lower
Shares of VMware shed more than 10% in the wake of the Q2 earnings report and may move lower. The caveat for the bears to consider is that price action appears to be finding support above the previous range which is a technically strong level. Assuming that price action is able to maintain support at this level we would expect to see a consolidation and an eventual move higher. Today's move was driven in part by the 17% short interest, if not in total because the fundamentals don’t warrant such a big move. If the Bears can't get the stock below $143 we would expect to see short covering up again soon afterward.
