Why Some Analysts Are Cautious about VMware’s Prospects


Dec. 25 2017, Updated 10:30 a.m. ET

VMware reduced to ‘hold’

In the previous part of this series, we looked at the factors that led various industry analysts to upgrade their ratings for VMware (VMW) stock and increase their price targets. However, Drexel Hamilton and Gabelli have cut their ratings for VMware stock from a “buy” to a “hold.” Brian White, an analyst with Drexel Hamilton, explained the cut, stating that although the company’s execution has been excellent, VMware stock’s valuation is now “less compelling,” and its revenues and earnings are “peaking.”

Hendi Susanto, an analyst with Gabelli, said the reason for the rating cut was “based on valuation and an insufficient margin of safety.”

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5G wireless will change networks’ infrastructure

According to Brian White, VMware stock is “Trading at just under 17x our CY:18 EPS projection (ex-cash) or a straight P/E of just under 22x, VMware is not expensive; however, we are finding it increasingly difficult to find enough upside to justify a Buy rating at this time. However, we remain optimistic around the company’s growth businesses and new opportunities around NFV with the roll out of 5G in the coming years.”

5G, which refers to fifth-generation technology, is said to offer ten to 100 times faster wireless data speeds than 4G (fourth-generation) technology.

The network infrastructure space is undergoing a significant evolution due to SMAC (social, mobile, analytics, and cloud) as well as the increased adoption of IoT (Internet of Things) applications.

VMware provides offerings that enable customers to build an optimized, secure network infrastructure across the public, private, or hybrid cloud environment. Being a prominent player in the virtualization software space, VMware is bound to be impacted by the forces shaping the overall network infrastructure environment.

According to Kuam.com, 5G networks are expected to account for approximately 5% of overall spending on wireless network infrastructure by 2020. This figure is expected to increase to more than 40% by the end of 2025 with significant investments expected to find their way into 5G NR (new radio), NextGen core and transport networking infrastructure between 2020 and 2025.


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