The multi-cloud sector is getting crowded but there may be enough revenue to go around
The month before its earnings report was rough on VMware (NYSE:VMW) shareholders. The stock fell 30% from a closing price of $167.06 on Oct. 22. If you are one of those holding that heavy bag, the first step towards recouping your loss would be a stellar earnings report. Well, you can check off that box. VMware delivered a double beat after the market closed on Nov. 23.
Earnings for the quarter came in at $1.72 which was 11.98% better than the $1.54 consensus of analysts. It was also 3% higher from the same quarter in 2020. Revenue came in at $3.19 billion which was 3% higher than the forecast for $3.12 billion. However, that was 9% higher than the previous year quarter.
Furthermore, the company’s chief executive, Raghu Raghuram told Reuters that the company believes it will post revenue global growth in the company’s next fiscal year.
“IT spending continues to stabilize going into next year,” said Raghuram. “Our view is that customers will continue to accelerate their application modernization.”
However, in after-market trading, the best thing that investors can say is that the report has seemed to stop the bleeding. VMW stock bounced 3% just prior to the market closing but failed to hold that gain. For now, shareholders will have to wait to see if the earnings report will be enough to change the opinion of analysts.
A Virtual Necessity
For those that are unfamiliar with VMware, the company came on the scene in 2001 with its first virtual machine. The company is now one of the leaders in the data center server visualization market and counts many enterprise data center servers among its client base.
VMware is also a player in the hybrid cloud space and multi-cloud management. This is a market that, according to Grand View Research will grow to $32.75 billion by 2029. This calculates to a compound annual growth rate of 26.3%.
That’s the good news. The not-as-good news is that this is a very crowded space. And while VMware appears to have a very loyal customer base, it remains to be seen how much of that pie will be available to them.
Short-Term Pain For Long-Term Gain
However, a larger question mark for analysts appears to be the relatively slow adoption as the company pivots to a subscription-as-a-service (SaaS) model. In its prior quarter, SaaS revenue made up about 25% of total revenue. That was about the same in the company’s current report.
Many companies have made this transition to recurring revenue because, in the end, it almost always leads to higher multiples. But while the transition happens, the company is giving up large, upfront license sales for small, recurring revenue streams.
And that’s one thing that has analysts starting to lower their price targets.
The Bottom Line On VMW Stock
Yet another concern is that, although the company has successfully completed its spinoff from Dell Technologies (NYSE:DELL), over 50% of the company’s outstanding shares are still controlled by Michael Dell and Silver Lake.
Analysts have a consensus rating of Hold on VMware and several analysts have lowered their price targets. With that said, the consensus price target post earnings is $165.69 which would be 42.25% higher than its current price.
However, that price target is lower than the stock’s 52-week high which suggests that analysts believe that the current selloff in the stock was justified. Although, as I look at the company’s stock chart, it does appear that the selloff is overdone.
And that’s why VMW stock is likely to move higher. But that may not happen as soon as some investors would like. That’s why we're bullish on VMW stock as a long-term buy. However, for investors looking for a more immediate gain, there appear to be better options.