Unlike other cloud plays, VMW stock didn’t get a tremendous boost from pandemic tailwinds. Yet despite investors rotating out of tech stocks, this underperforming name could still move higher.
VMware (VMW) may have beaten analysts’ estimates late last month, but the results hardly had an impact on its stock price. Since releasing its quarterly results on Feb. 25, shares have continued to trade sideways, as they have done for most of the past year.
Investors interested in buying VMW at current levels may benefit from the fact that the stock did not gain in value like many of its peers.
Similar to the situation with Splunk (SPLK), the company’s shift to a software-as-a-service (SaaS) based business model makes it appear to be a slower growing business than it is in reality. As this transition continues, the company’s growth will pick up, which will help justify a higher valuation.
While this bodes well for the stock going forward, shares will likely continue trading sideways in the near-term, until VMware’s majority owner, Dell Technologies (DELL), finally spins off the rest of its stake.
Patience is key in this situation, however, while it may take some time, shares could finally move higher once the spin-off catalyst plays out.
VMW Stock Has Gone Nowhere For Too Long
Over the past year, most tech stocks have shot up too far, too fast. They have rallied to prices that are not sustainable relative to their valuations.
By contrast, VMW has seen the opposite occur. The shares have gone nowhere, for too long, and investors continue to value the company at a discount to its peers.
Yet, while high-single digit revenue growth pales in comparison to some of the results posted by faster growing cloud names, one needs to consider that the company is in the process of pivoting to a SaaS-based business model.
As VMware’s SaaS segment becomes a larger piece of the revenue mix, its level of growth will improve. This could result in the expansion of price multiples, despite the possible overall contraction of tech sector valuations in the coming year.
Waiting On Dell To Complete The Spin-Off
The caveat to the bull case for VMW is Dell’s majority ownership stake in the company. It may be publicly traded, but Dell owns 81% of its outstanding shares.
According to interim CEO, Zane Rowe, VMware is “making progress” with regards to the spin-off. Investors buying VMW today may need to be patient until Dell’s divestiture is able to unlock its underlying shareholder value.
Last June, the tentative spin-off date was set for September 2021. Regardless of the uncertainty around when this catalyst will actually transpire, buying the stock at current levels may turn out to be a wise decision in hindsight. Further developments regarding this transaction could cause investors to miss the opportunity to buy into VMW at current price levels (around $139 per share).
What Analysts Are Saying About VMW Stock
Consensus among Wall Street analysts is a Moderate Buy based on 6 Buys and 8 Holds. The average analyst price target of $163.50 per share, implies around 18% upside potential from current levels over the next 12 months. Price targets range from a high of $180 per share to a low of $145 per share. (See VMware stock analysis on TipRanks)
Bottom Line: Patience Is Key
While other cloud stocks experienced huge gains in 2020, the price action in VMware stock was uninspiring. But with richly-priced tech stocks trending lower after last year’s “melt up”, now may be a good time for investors to start adding VMW to their portfolios.
With the potential for VMW to break out of the sideways range once the Dell spin-off is complete, this 2020 underperformer could turn out to be an outperformer over the next 12 months.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
