Is VMware Stock a good $100 bet?

VMware (NYSE:VMW), a cloud computing and virtualization technology company, has seen its stock significantly underperform in recent years, falling about 5% from lows in March 2020, compared to the broader Nasdaq-100, which remains in up about 75% over the same period, even after registering a big sell-off this year. The stock has only gained 8% over the past five years, compared to the Nasdaq which has risen more than 2 times. The stock’s underperformance comes as the company faces challenges. Businesses Are Increasingly Shifting Their Computing Needs to Public Clouds, Hurting VMware

virtualization offerings in recent years. Additionally, the company also paid a large special dividend of $27.40 per share late last year following Dell’s decision to divest its VMware stake, which likely caused some selling pressure on the stock.

However, there seem to be several catalysts for growth. The company has repositioned itself to meet the hybrid cloud model that is increasingly popular with large enterprises. With the hybrid model, companies use public cloud services such as Amazon Web Services or Google Cloud, while keeping some operations on their private on-premises data centers. VMware’s hybrid cloud offerings include Tanzu, an application platform, and VMware Cloud, a cloud infrastructure service. VMware’s offerings are also cloud platform independent and work well with multiple cloud providers. Cloud-related sales are recovering well, with subscription and SaaS revenue for fiscal year 2022 (fiscal year ending January) of approximately $3.2 billion, up 23% from last year. ‘last year. While that’s only about 25% of the company’s total revenue for the year, it expects it to exceed 40% of its total revenue in its fiscal year. ending January 2025. These revenues are largely recurring and should help overall VMware revenue visibility while potentially helping long-term margins. VMware also has a large existing customer base that could help it drive cloud sales in the future. The spinoff from Dell will also give the company more independence with its longer-term operations and strategy, while potentially unlocking some value for shareholders.

VMware shares are trading at around 14 times consensus FY23 earnings, which we believe is reasonable given the company’s longer-term outlook and thick margins. We value VMware stock at around $145 per share, about 40% ahead of the current market price. See our analysis on VMware Valuation : Expensive or cheap for more details on what drives our price estimate for the company. See also our analysis of VMware revenue for a more in-depth look at the company’s main sources of revenue and how they have evolved.

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