Most of our great chip companies today like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) don’t own semiconductor fabrication plants. Similarly, VMware (NYSE:VMW) is trying to be the one great cloud company without a cloud.
VMware is the leader in virtualization, a key cloud technology, and it has built a suite of cloud tools around it called vSphere. But Dell Technologies (NYSE:DELL), which controls 82% of VMW, doesn’t have its own cloud.
But VMware is trying to make up for that through alliances that help enterprises build hybrid clouds. Hybrid clouds put some resources in public clouds and make central services more cloud-like. The pitch is that, unlike small cloud tool makers like CloudSimple, VMware is not for sale, and thus it’s a trusted partner.
Forming the VMW Team
VMware results can look choppy because it didn’t take its present form until late last year, as part of Dell’s return to the public market. Since then it has been on a buying spree, spending $4.8 billion on Pivotal Software and Carbon Black. Those deals don’t close until early next year.
The company has also spent $500 million on Heptio, launched by two of Kubernetes’ founders. This acquisition will let VMware integrate Kubernetes into vSphere.
VMW is now working to integrate its acquisitions and make vSphere into a complete cloud software solution. Carbon Black is seen as its “preferred” security solution. Pivotal Software is facing layoffs.
VMware Has Other Friends
VMware’s target market includes people working inside big companies charged with building and managing corporate resources in a cloud environment. The idea is to offer a complete, integrated software that can work with any public cloud and build private ones as well.
VMware’s alliances are meant to reassure customers their VMware software will work seamlessly with public clouds while they build their private systems. Where it needs to build small data centers it does so, allowing the company to partner with vendors that are strong in specific regions.
The company has extended a partnership with International Business Machines (NYSE:IBM), even though it competes with IBM’s Red Hat unit. It works with Amazon’s (NASDAQ:AMZN) AWS cloud, and allies with smaller companies like Rackspace and NetApp (NASDAQ:NTAP) there.
The argument here is that staying independent of the big clouds requires a software partner that is also independent.
Where’s the Money?
VMware’s revenue seems to be growing at about 12% per year, and operating income is growing at half that rate. The numbers were skewed by a $4.9 billion income tax benefit taken for the August quarter. This makes the company seem very cheap, with a trailing price-to-earnings ratio of 11.4, but it’s a one-time thing.
When Dell went public, it took on the big debt load, freeing VMware to make its acquisitions. Dell may want to buy up VMware in the future, but such a move would be costly. VMW’s market capitalization is $70.3 billion and VMware stock trades at over 7.5 times revenue.
All the chopping and changing has taken a toll on VMware stock. Year-to-date gains of almost 50% in May nearly vanished by August. Now, in recovery mode, VMW is back up 25% since the start of 2019.
The Bottom Line on VMW Stock
Analysts who have followed VMware stock are split, with half saying “buy it” and slightly under half in the wishy-washy “hold” category.
VMware had about $4.2 billion of debt, but $3 billion in cash, at the end of July. As the software side of Dell, it is in a good financial position to accelerate growth into 2020. If the hybrid cloud bonanza is finally starting, VMware is a good place to grab your share.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
