What Is VMware’s Value Proposition in the US Software Space?



VMware’s scale in the software space

Earlier in this series, we discussed VMware’s (VMW) analysts’ expectations from its 2Q16 earnings. We also discussed the factors that impacted its stock price.

Now, let’s look at the company’s value proposition among select virtualization software companies in the United States. Let’s start with VMware’s size.

On July 11, 2016, and as the above chart shows, globally, Microsoft (MSFT) was the largest software player by market capitalization in the virtualization space. It was followed by VMware. Citrix Systems (CTXS) and Red Hat (RHT) follow these players in the virtualization space.

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VMware’s enterprise value multiples

Now let’s look at VMware’s EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple. We’ll also look at other US software players.

VMware was trading at a forward EV-to-EBITDA multiple of ~7.2x on July 11, 2016. This metric was lower than Microsoft’s and Citrix Systems’s multiples of ~9.8x and ~9.4x, respectively. Red Hat was trading at a forward EV-to-EBITDA multiple of ~16.1x on the same day.

VMware’s dividend yield

VMware and its peers Red Hat and Citrix Systems don’t pay dividends. Microsoft’s forward annual dividend yield was ~2.7% on July 11, 2016.

You can consider investing in the SPDR S&P 500 ETF (SPY) to gain exposure to the technology sector. This ETF invests about 8.4% of its holdings in the application software space.


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