VMW Stock Forecast: VMware Is A Good Bet On Cloud Computing

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary:

  • In spite shelling out $11 billion as special dividend payment to 81% owner Dell, VMWare still touts more than $11.6 billion in cash & short-term investments.
  • VMWare therefore has enough cash for R&D and expansion purposes.
  • Hybrid Cloud is VMware’s best bet to become a major player in global Software-as-a-Service.
  • VMWare’s next growth driver is data virtualization. Data virtualization is projected to have a market size of $278 billion by year 2023.
  • Server virtualization, which VMware dominates, is only expected to have a market size of $8 billion by year 2023.

In spite of its +353.80% three-year price return, I am still endorsing VMware (VMW) as a buy. My fearless forecast is that the rapidly-growing data virtualization industry is a long term tailwind for VMW. VMWare become no.1 in server virtualization, it can also become no.1 in data virtualization services.

(Source: Seeking Alpha)

The server virtualization industry (where VMware’s vSphere is number one) is only projected to have a 7% CAGR for the next four years. It will be worth $8 billion by year 2023. In comparison, the data virtualization is a much bigger opportunity. Market Research Future expects data virtualization to grow at 15% CAGR. This industry will have a market size of $278 billion by 2023.

VMWare Has The Best Rated Data Virtualization Solution

As per Predictive Analytics Today’s survey, VMware’s Cloud Management Platform is still the best option for data virtualization requirements. VMware Cloud Foundation is a hybrid private/public cloud platform where customers can securely run compute, data storage, management, and networking applications.

(Source: VMware)

Going forward, vSphere can run virtualized servers, productivity software, CRM, ERP, and Big Data collection/analytics applications on-location or in the cloud. VMWare’s server, app, and data virtualization services can be installed and run on local machines or on Amazon (AMZN) Web Services.

VMware Cloud is hosted on AWS. It is an affordable data center-in-the-cloud solution where enterprises can migrate their on-premise VMWare networks. AWS and VMWare are only charging $8.36 per hour on enterprise-level VMWare Cloud service.

 (Source: VMware)

The low-cost approach of VM Cloud will help it outpace the growth of its rivals like Denodo and Informatica. The integrated cloud management and data virtualization platform of VMware is called the vRealize Suite. It helped propel VMWare as the world’s number 1 provider of cloud system management software in 2017. VMWare’s revenue from cloud system management software in 2017 was $906.7 million. This represented a market share of 21.7% of a $4.2 billion niche market. The closest rival is Microsoft (MSFT) with 14.5% market share.

For decades now, Microsoft’s Hyper-V has been the stiffest rival of vSphere. This is why VMware chose Amazon Web Services for its hybrid cloud products. Microsoft is likely not willing to help VMWare compete better using the Azure platform. Amazon does not sell or rent virtualization software.

VMware Is The Global Champion of Hybrid Cloud

The long-term investment quality of VMW is fortified by VMware’s leadership position in hybrid cloud. Synergy Research has often identified VMware as the true leader in hybrid cloud. Hybrid cloud is the second-fastest growing category of the $250 billion cloud market ecosystem. The overall global cloud computing services market is also growing at 32% CAGR.

(Source: AP/Synergy Research)

According to industry analytics firm Markets and Markets Research, the hybrid cloud market was worth $44.60 billion last year. This will grow at 17% CAGR and it will have a market size of $97.64 billion by year 2023. You should add more VMW shares because the fast-growing hybrid cloud business is being lead by VMware.

Conclusion

VMware had to make a special dividend payment of $11 billion to its parent company Dell (DELL) last December. It helped Dell buyback the tracking stock on VMWare. In spite of this huge payout, VMWare still finished 2018 with more than $11.5 billion in cash & short term investments.

(Source: Seeking Alpha)

VMware still has enough cash reserves to further increase its R&D budget. It also has enough cash reserves to fund more future acquisitions. VMware’s most recent acquisitions include Aetherpal, CloudCoreo, CloudHealth, and CloudVelox. Inorganic growth through acquisitions is a legitimate strategy for VMware’s long-term prosperity.

VMW is also a good buy because it has lower EV/EVIDTA, P/E, and P/B valuation ratios than Red Hat (RHT).

(Source: Seeking Alpha)

Lastly, I Know First has a very bullish buy signal for the 12-month market trend period of VMW. VMware’s stock has a 12-month trend score of +283.48. A particular ticker only needs to score 100 and above to achieve a bullish buy signal.

How to interpret this diagram.

I Know First Algorithm Heat-map Explanation

The I Know First algorithm identifies waves in the stock market to forecast its trajectory. Every day the algorithm analyzes raw data to generate an updated forecast for each market. Each forecast includes 2 indicators: signal and predictability.

Signal

The signal represents the predicted movement and direction, be it an increase or decrease, for each particular asset; not a percentage or specific target price. The signal strength indicates how much the current price deviates from what the system considers an equilibrium or “fair” price.

Predictability

The predictability is the historical correlation between the past algorithmic predictions and the actual market movement for each particular asset. The algorithm then averages the results of all the historical predictions, while giving more weight to more recent performances.

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