Though VMWare (NYSE:VMW) stock continues to perform well in an increasingly competitive cloud environment, many question its future. The Palo Alto, California-based provider of virtualization software continues to increase revenue and profits. However, VMW has struggled for most of 2019 as evolving technology threatens its businesses.
This issue has created a situation where investors have to ask themselves two questions. They must first figure out whether or not to invest in VMWare, and if so, they must also decide whether that will come through VMW stock.
The Two Questions to Ask About VMWare Stock
Admittedly, deciding whether or not to buy VMWare stock has become more difficult. I made a bullish call on VMW stock last September. As for the result, I was right until I was not right.
Although VMW increased for much of the fall, the changing technology landscape poses risks to VMWare’s business model. Consequently, VMWare stock fell following third-quarter earnings despite beating revenue and profit estimates. Now it trades just slightly higher than where I recommended it at the time.
Experts see threats such as Kubernetes, the open-source system initially developed by Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), which allows companies to perform virtualization without VMWare’s vSphere platform. Now, vSphere sales growth underperforms the company overall, posing a danger to long-term growth.
VMW acknowledges the threat. It has made acquisitions such as Carbon Black and Pivotal Software (NYSE:PVTL) to compete. Still, how much that will help VMWare respond remains unclear.
Secondly, investors need to ask themselves if VMW stock is the best way to invest in VMWare. Unlike most equities, VMW competes with itself. What I mean by that is that Dell Technologies (NYSE:DELL), a more generalized IT products and services company, owns 81% of VMWare. By buying Dell stock, investors can benefit from the growth of VMWare while hedging the risk with DELL stock.
At a forward price-earnings (PE) ratio of around 21.5, VMWare stock is not the high-flyer it was before the financial crisis. Moreover, with DELL selling for only 7.3-times forward earnings, the lower multiple will appeal to more risk-averse investors.
Most Traders Should Choose DELL Over VMW
InvestorPlace contributor Vince Martin spells out both the pros and cons of either approach. However, he chose to invest by buying Dell stock. Not only did he buy DELL, but he also decided to hedge by purchasing bearish options positions in VMW stock.
Moreover, in 2022, Dell will have the option of purchasing the remaining VMW stock shares or spin them off to Dell’s shareholders. Hence, VMW faces uncertainty not only in its industry but also with the future of VMW stock.
Given this information, I think only the most risk-tolerant investors should buy VMW stock. If it finds a way to restore its growth amid the competition, I believe VMW will see huge gains. Also, the growth in the cloud industry will boost VMW earnings. However, the signs in the industry point to some struggles compared to other peers. Buying VMWare’s parent Dell somewhat insulates traders from this uncertainty.
Concluding Thoughts on VMW Stock
VMWare investors have to decide not only if, but how to trade shares in the company. On the surface, VMWare continues to prosper from the growth of virtualization. However, new products leave some wondering whether technology will make its flagship product, vSphere, obsolete.
Moreover, the ownership stake of Dell presents questions. Dell launched its first initial public offering in 1988 before taking the company private in 2013. DELL stock returned to trading floors last year when it bought back the VMWare tracking stock from EMC Acquisitions. Now, with Dell stock again trading, it could choose to buy the rest of VMWare or spin it off.
Given this reality, I would direct everyone without a risk tolerance and in-depth industry knowledge to choose Dell over VMW stock. However, regardless of the choice, investing in VMW stock is both a question of tech knowledge and investment tolerances.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.