If You Like VMware Stock, Buy Microsoft Instead

VMware’s (NYSE:VMW) third-quarter results, reported on Nov. 26, beat analysts’ average estimates. But VMW stock fell on the news. 

VMware Stock Will Keep Heading Higher on Private Cloud Enthusiasm
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InvestorPlace contributor Vince Martin owns Dell Technologies (NASDAQ:DELL) stock. Dell, in turn, owns 81% of VMware.  Martin recently explained that VMware’s vSphere platform “allows data-center hardware to run multiple operating systems and to be shared by multiple end users.” 

Who better to detail the pros and cons of VMware stock than someone who’s got skin in the game? I suggest you read Martin’s article if you’re thinking about buying either Dell or VMW stock. The column is an eye-opener.

Anyway, Vince’s commentary can be summarized in two short sentences:

The biggest reason to avoid VMW stock is that there are no guarantees that the company will be able to successfully pivot to the cloud from its current business model focused on on-premise servers.

The biggest reason to consider buying VMware stock is that its risks are way overblown, and VMW stock is, consequently. insanely cheap. 

But there are two other options: Buy Microsoft (NASDAQ:MSFT) or perhaps  Dell.

Why Microsoft?

I believe in options. Not the kind you trade or the type a company gives you for a job well done. I mean examining every possible choice.

There aren’t just two choices when it comes to stocks; there are thousands of U.S.-listed stocks to choose from.  Vince’s article notes that MSFT has already successfully completed the transition to the cloud. That makes MSFT stock the safer bet. 

“The need to pivot to the cloud from legacy on-premise offerings obviously isn’t unique to VMware. Microsoft has done it masterfully, though even that giant did let Amazon.com (NASDAQ:AMZN) take the lead in the cloud with its Amazon Web Services,” Martin stated.

Microsoft might be in second place to Amazon’s AWS unit when it comes to the cloud. Still, Microsoft CEO Satya Nadella has his company dialed in right now, guaranteeing Jeff Bezos a real fight in the next few years. 

I discussed Microsoft’s growth opportunities at the end of November, focusing specifically on its desire to put more resources into its Microsoft Teams enterprise messaging solution. That’s great news for the owners of MSFT stock, and it’s not so good for those who own Slack (NYSE:WORK).

At the moment, Microsoft is an embarrassment of riches.  

In the last year, Microsoft had $38.6 billion of free cash flow. It has a free cash flow yield of 3.5% based on a $1.1 trillion enterprise value. 

In the last year, VMware had $3.5 billion of free cash flow. It has a free cash flow yield of 5.4% based on a $65.3 billion enterprise value.

For value investments, I generally require FCF yields of 8% or higher. 

So the question I have is whether it makes sense to risk hard-earned capital for a 1.9 percentage-point difference between the two companies. 

From where I sit, Microsoft stock is a more natural and safer choice. 

The Bottom Line on VMW Stock

Martin, the other InvestorPlace contributor, laid out the reasons why he owns Dell stock and not VMware stock in his November article. 

“VMW’s strong free cash flow adds to the options of VMware’s majority owner, Dell.  Starting in 2022, (Dell’s) owners can either buy out VMW’s minority shareholders or spin VMW off to DELL’s shareholders…(and) choose the most beneficial path for (its) shareholders,” he wrote.

Although Martin does suggest that VMW stock is an attractive pick at its current prices, he hasn’t bought VMware stock. Instead, he’s  buying Dell and hedging its exposure to VMW. That should tell everyone everything they need to know about the smarter course of action.

Caveat emptor.   

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

 

    

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/if-you-like-vmware-stock-buy-microsoft-instead/.

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