Today, investors in VMware (NYSE:VMW) are seeing a lot of red. Indeed, shares of VMW stock are down approximately 8% at the time of writing. Today’s price action in VMware certainly doesn’t jive with the overall market. Most indices are up substantially, at around 1% today.
With many stocks hitting new all-time highs, companies like VMware that are retreating on a day like today are worth noting. After all, this enterprise software company has been an incredibly stable growth stock that long-term investors have flocked to in recent years. Over the past five years, shares of VMW stock have approximately doubled, growing in a rather consistent fashion.
However, as earnings season heats up, specific companies like VMware are seeing outsized volatility of late. Today, this happens to be the case with VMW stock. Let’s dive into why investors are pricing in negative sentiment in VMware following its earnings.
VMW Stock Drops on Disappointing Earnings Release
Looking at VMWare’s recent Q2 results, it appears a confluence of factors are the cause for today’s decline.
Revenue missed on the top line, growing “only” 9% on a year-over-year basis. Investors and analysts had priced in more aggressive top-line growth. Indeed, given VMware’s status as a growth stock, this number alone was cause for concern for investors.
Other analysts pointed to the changing mix of revenues for VMware as a cause for concern. Specifically, VMware reported higher licensing revenues, with lower subscription and SaaS (Software-as-a-Service) revenue, as a percentage of the total. This changing mix could have negative implications for the stability of the company’s long-term revenue outlook. Accordingly, some analysts downgraded their target prices for VMW stock on the news.
Finally, VMware provided forward guidance in line with its previous full-year guidance (as of last quarter). Investors appeared to have been looking for some sort of guidance boost. Accordingly, expectations are that this shifting mix of revenues is likely to continue. Such a move could put pressure on the company’s valuation. This appears to be the case today.
The overall outlook for VMware’s core business appears to be strong. However, investors looking for top-notch growth stocks have a number of high-quality options today. Accordingly, it appears some rotation is taking place out of VMW stock into other high-grade names right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.