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Why VMware’s Stock Could Rise after Its 2Q16 Results

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Factors that helped VMware to post growth in 1Q16

Earlier in this series, we discussed analysts’ expectations from VMware’s (VMW) soon-to-be-announced 2Q16 results. In the last five quarters, VMware’s quarterly results have managed to beat analysts’ expectations on revenues and earnings.

Despite providing weak guidance for 2016, VMware’s 1Q16 results beat analysts’ estimates, which helped its stock to rise by 10% after its results were released.

In mid-June 2016, VMware launched VMware TrustPoint, a new endpoint security solution. To leverage its dominance in the virtualization and data center space, VMware devised its cloud strategy, which focuses on hybrid cloud infrastructure and development. In 2016, VMware and IBM (IBM) announced a strategic partnership that would be symbiotic to both players in the hybrid cloud space.

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VMware’s 1Q16 revenues grew by 5.2% to $1.6 billion on the back of strong results from NSX, the company’s network virtualization platform. NSX, a part of VMware’s SDDC (software-defined data center) architecture, is a virtual networking and security software platform. VMware stated that NSX license booking, which is its network virtualization business, continued to grow by over 100% on a YoY basis in 1Q16.

VMware’s strategic focus on NSX in the SDN (software-defined networking) market is opportune. IDC’s (International Data Corporation) 2016 report stated that it expects the SDN market to grow at a CAGR[1. compound annual growth rate] of 53.9% between 2014–2020 to reach $12.5 billion by 2020.

VMware’s Virtual SAN, which is the company’s virtual storage offering in the HCI (hyper-converged infrastructure) space, grew by ~200% on a YoY (year-over-year) basis in 1Q16. The increased traction of VMware’s new offerings enables the company to post growth.

Brexit’s impact on technology stocks

In late June 2016, the Brexit referendum sent the global financial markets into a steep fall, including the technology sector. Apart from VMware, major technology companies saw their stocks fall in the range of 3%–8% on June 24, 2016. These companies included:

Please read Why Brexit Led to a Surge in the US Dollar (UUP) for insight into the impact this referendum had on most of the technology companies. Including Oracle, Symantec, Microsoft, and IBM, these companies derive a majority of their revenues from regions outside the US.

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