Does VMware’s Stock Drop Present a Buying Opportunity?

With shares of VMware (NYSE:VMW) trading at around $78.71, is VMW an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

 

jobsC = Catalyst for the Stock’s Movement

VMware recently released news that hasn’t been well-received by investors. Perhaps the biggest news is that the company will cut 900 jobs, which is 7 percent of its workforce. In some cases, cutting jobs can be looked at as a positive, but that’s not the case here. This news came out at around the same time it was revealed that the Q1 revenue outlook was below expectations at $1.17 billion to $1.19 billion. The expectation was for $1.25 billion. The reason given was decreased demand. It looks as though Microsoft Corporation (NASDAQ:MSFT) might be playing a role, sneaking its way into the business and stealing market share. There is a chance that this has led to VMware cutting its prices. On a smaller scale, Oracle Corporation (NASDAQ:ORCL) might also be stealing market share.  

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As far as Q4 earnings go, EPS came in at $0.47 compared to $0.46 from the same quarter last year. Q4 revenue was a record $1.29 billion, which was also a 22 percent increase year-over-year. FY2012 revenue was $4.61 billion — also a record. In addition to that, margins improved. On the negative side, Q4 operating cash flow decreased 12 percent, and Q4 free cash flow decreased 19 percent.

Let’s take a look at some important numbers for VMware before forming an opinion…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for VMware are both very strong.  

Debt-To-Equity

Cash

Long-Term Debt

VMW

0.08

$4.40 Billion

$450.00 Million

CTXS

0.00

$683.05 Million

$0

MSFT

0.20

$68.31 Billion

$14.19 Billion

 

T = Technicals on the Stock Chart Are Weak

For a three-year time frame, VMware has performed well. It has outperformed Citrix Systems (NASDAQ:CTXS) and Microsoft. However, the past year hasn’t been as kind. While the broader market has rallied, VMware has performed poorly. This is never a good sign.

1 Month

Year-To-Date

1 Year

3 Year

VMW

-14.65%

-15.82%

-14.11%

74.52%

CTXS

6.27%

4.13%

4.90%

64.45%

MSFT

4.71%

4.08%

-2.20%

6.31%

 

At $78.71, VMware is currently trading below all its averages. This is extremely rare in the current market environment. All TA support levels have been breached.

50-Day SMA

92.61

100-Day SMA

92.34

200-Day SMA

94.21

 

E = Earnings Have Been Steady

Earnings have increased on an annual basis since 2009, which is relatively common. This includes 2012 (EPS $1.72,) which isn’t listed in the chart below. Revenue has increased every year since 2008, which is uncommon. This includes 2012 ($4.61 billion,) which isn’t listed in the chart below.

2007

2008

2009

2010

2011

Revenue ($)in billions

1.33

1.88

2.02

2.86

3.77

Diluted EPS ($)

0.61

0.73

0.49

0.84

1.68

 

We already know what happened this quarter. Now let’s take a look at what happened in previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

941.86M

1.06

1.06

1.12

1.13

Diluted EPS ($)

0.41

0.47

0.44

0.44

0.36

 

T = Trends Support the Industry, But Not the Company

VMware provides virtualization software that allows one computer to act as several machines at once. This, in turn, helps companies reduce costs. This is a great technology, but what happens when bigger players move in and copy that technology? This doesn’t mean the end of VMware, but it does mean decreased market share.  

Conclusion

VMware has decent margins and cash flow, a strong balance sheet, and a history of showing consistent revenue growth. On the other hand, the phrases “weak outlook” and “increased competition” can make investors run for the hills. Considering there is a 12.90 percent short position on this stock, some people are quite pleased at the moment. However, the selling seems to be a little overdone here. Despite increased competition, VMware is still likely to show respectable growth. If organic growth doesn’t work out, then they can grow through acquisitions, considering the amount of cash available. Another option if the stock continues to get hurt is to reward shareholders with buybacks and/or dividend payments.

As far as the future of the stock price goes, it’s likely to remain in the same trading range it has been stuck in over the past two years. Therefore, VMware is currently a WAIT AND SEE.

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