For VMware, Inc. (NYSE:VMW), it’s been a pretty good year so far. VMW stock is up about 21% year-to-date, despite lagging other notable tech operators like Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB) and Netflix, Inc. (NASDAQ:NFLX).
So what’s in store for VMW stock going forward? Well, on Thursday we’ll get a better idea — that is, when the company releases its first-quarter results (they will come out after the market closes).
As for the Street consensus for VMWare earnings, the revenues are expected to increase by 7.5% to $1.71 billion and earnings to hit 95 cents a share, compared to 86 cents for the same period a year ago.
For the most part, the bar is not set too high. And more importantly, VMW has a pretty good track record when it comes to its earnings.
What to Expect From VMware Earnings
During Q4, for example, there was an impressive beat on the top and bottom lines. According to CEO Pat Gelsinger: “Q4 closed out a strong fiscal 2016 and was one of the most balanced quarters for VMware in years. We’re very pleased with our strong product momentum and customer enthusiasm for our Cloud strategy.”
The company’s newer products are certainly gaining traction, helping to offset the declines in various legacy businesses. In the quarter, VMWare’s customer count for its NSX system came to 2,400, more than doubling on a year-over-year basis. Keep in mind that the company announced a deal for a hefty $10 million.
There was also considerable strength from the vSAN line, which also pulled off a 2X+ increase in the customer base.
Now when it comes to the cloud space, VMWare does get overshadowed by other high-profile operators like Salesforce.com, Inc. (NYSE:CRM). But then again, the fact remains that the company’s technologies are standout. A key is that VMWare allows for the cloud to be accessed in a hybrid form, such as from the public Internet or private networks. No doubt, this capability is very important to large customers that want more control and security over their data.
OK, as for the upcoming Q1 report, what will investors be looking for? First of all, they will want to get more details on the progress with VMWare’s partnership with AMZN, which was announced in October. The deal involves the company’s vSphere cloud service on AWS (Amazon Web Services), allowing for hybrid environments.
Bottom Line on VMW Stock
Given the massive user base of AMZN, which is the largest cloud provider, the partnership could move the needle. Although, the true impact may not come until next year.
Next, Wall Street will want to get a sense of NSX. Is the momentum continuing? And how might the deal with AWS impact things? Interestingly enough, when it comes to VMW stock, NSX is perhaps the most important driver. Note that the run-rate — in terms of bookings — is at $1 billion.
On the Q1 VMWare earnings call, the CEO noted: “I believe the market opportunity for us in NSX is larger than the ESX vSphere opportunity over time. Because the market for networking is larger. In a multi-cloud world, it plays a critical function in terms of tying clouds together across environments.”
Great, right? Definitely. Yet it will still take time to make the transition. And besides, VMW stock is not necessarily cheap, as investors have already been baking in lots of the good news. The price-to-earnings ratio is at 34X, despite the fact that the company is still growing at only the single digits. In fact, Wall Street’s consensus price target on VMW stock is also at roughly the current valuation. So given all this, it probably makes more sense to wait for a better price.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
