Our VMware Stock Prediction In 2019 (Buy or Sell?)
This aging, 10-year bull market staggered into 2019 on wobbly legs. The major stock indexes posted their worst yearly performances in 2018 since the financial crisis.
The bull is battered but still standing. How long before it collapses and dies?
Born in early 2009 amid the rubble of the Great Recession and global financial meltdown, the current market upswing is the longest in U.S. history, surpassing the streak that lasted from 1949 to 1956.
As market tumult this year spooks investors, it’s more important than ever to stay focused on underlying fundamentals. That’s why you should continue to be bullish on the technology sector, which remains high in liquidity, low on debt and long on prospects.
That’s right. Even as investors make the transition this year from momentum stocks to safer sectors, you shouldn’t turn your back on technology. Over-hyped tech stocks such as the FAANGs are poised for further tumbles this year, as unrealistic expectations collide with reality. But certain tech stocks are still good bets for growth, without undue risk.
Does high-flying VMware (NYSE: VMW) fit the bill? The company’s stock recently spiked higher in the wake of bullish assessments from Wall Street analysts, which in turn has generated positive headlines for VMW. As I explain below, VMW stock has consistently beaten the broader market. Will the good times last for VMW?
Let’s look under the hood and see if VMware is a smart bet on growth in 2019 or whether it’s destined to fall back to earth like many of its tech sector peers.
What Is VMware?
Based in Palo Alto, California, VMware provides cloud, mobility, networking, and security infrastructure software to businesses in the U.S. and around the world.
VMware (market cap: $71.7 billion) offers VMware vSphere, a data center platform that allows users to deploy “hypervisor,” a layer of software that resides between the operating system and system hardware to enable computing virtualization; storage products; cybersecurity tools; and cloud management products such as VMware vCloud suite.
VMware also has made forays into the booming area of the Internet of Things (IoT), with such products as VMware Pulse IoT Center, an IoT device management and monitoring solution.
VMware has a strategic alliance with Amazon’s (NSDQ: AMZN) Amazon Web Services to build and deliver an integrated hybrid solution. VMware is a subsidiary of Dell Technologies (NYSE: DELL).
How Has VMware Stock Performed?
What Is VMware Stock History?
VMware has regularly outperformed the broader market, by wide margins.
- Over the past 12 months, VMW has gained 36.1% whereas the S&P 500 has gained 0.5%.
- Over the past two years, VMW has gained 95.2% whereas the S&P 500 has gained 17.2%.
- Over the past five years, VMW has gained 72.5%, the S&P 500 has gained 48.7%, and the benchmark Technology Select Sector SPDR ETF (XLK) has gained 95.3% (see chart).
How Has VMware Performed In 2017/2018?
- In 2017, VMW gained 58.8% whereas the S&P 500 gained 19.4%.
- In 2018, VMW gained 7.7% whereas the S&P 500 lost 7.5%.
Who Are VMware’s Rivals?
Microsoft (NSDQ: MSFT)
Microsoft (market cap: $862 billion) has successfully transitioned from software products to cloud services that generate recurring revenue. MSFT operates via several major divisions.
Productivity and Business Processes handles products and services involving productivity, communication, and information services. Office Commercial and Office Consumers handles Microsoft Office 365 subscriptions and licensing. Microsoft Dynamics is a business solutions suite of products.
Intelligent Cloud involves public, private, and hybrid server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and Microsoft Azure. Enterprise Services includes Premier Support Services and Microsoft Consulting Services.
The More Personal Computing division is a catch-all that offers products and services for developers, end users, and IT professionals. This is where the famous Windows software lives, along with Microsoft’s devices like Surface; gaming in the form of Xbox; and Search, such as Bing.
Microsoft acquired social media platform LinkedIn in 2016 for $26.2 billion.
Oracle (NYSE: ORCL)
Data base provider Oracle (market cap: $188.7 billion) has become a dominant brand name in cloud computing.
Oracle makes money from the cloud in two main ways. It sells access directly to applications, but it also provides tools to program and manage apps while analyzing data (its “platform” service).
Like Microsoft, tech giant Oracle has successfully transitioned away from its former core offering of installed software to embrace the boom in cloud computing.
Cisco (NSDQ: CSCO)
With a market cap of $230.1 billion, Cisco is the “Connectivity King.” The company is one of the biggest suppliers of Internet-based networking products, with routers and switches that are ubiquitous in offices, classrooms and government offices around the globe.
Cisco possesses a portfolio of popular cybersecurity products, a commanding presence in commercial IT, and long-standing ties with the global defense establishment.
All three of these major rivals to VMware boast strong balance sheets, proprietary technology, diversified and reliable revenue streams, and strong earnings prospects. VMware is forced to stay on its toes by fostering continual innovation.
Will VMware Go Up In 2019 (Should You Buy)?
VMware is positioned to benefit from the major long-term growth areas of technology, particularly the cloud, cybersecurity and IoT.
The cloud. The transition to the cloud is among the biggest tech trends afoot today. By using data storage and IT capabilities that are centralized and located offsite, companies are able to greatly reduce their processing costs through efficient outsourcing. It’s a disruptive technology that has been a “game changer” in the fast-moving tech sector. VMware is a leading player in cloud computing.
Cybersecurity. This rising incidence of hacking, cybercrime and industrial espionage is creating robust demand for corporate security. Proprietary information is a major competitive asset, but data security systems are riddled with vulnerabilities, especially as the workforce becomes more mobile and supply chains more global.
VMware is a brand name in providing cybersecurity products, with an entrenched and loyal customer base.
In this video, VMware CEO Pat Gelsinger discusses cybersecurity needs and how his company’s products address them:
Internet of Things. Another secular mega-trend is IoT, whereby everyday objects, from industrial machines to utility meters to wearable devices, use built-in sensors to gather data, communicate, and take action. The IoT trend will accelerate in 2019 and beyond, largely immune to scare-mongering headlines about, say, China or North Korea.
I’m also heartened by VMware’s strong cash flow and large cash hoard. The company has $13.5 billion in total cash on hand (most recent quarter), a war chest for possible acquisitions in 2019.
Reliable cash flow allows tech companies to make the consistently robust research and development (R&D) spending that’s necessary for them to maintain their competitive edge. Lots of cash on hand also provides a cushion for market downturns.
A tech company that doesn’t plow considerable cash into R&D will eventually get overtaken by rivals. A competitive tech company also requires seasoned management and a top-notch team of engineers, researchers, and developers, all of which VMware enjoys.
VMware’s forward price-to-earnings ratio (FPE) is 26.3, a modest premium to the FPEs of rivals Microsoft (22.5), Oracle (14.3), Cisco (15.1), and the S&P 500 (17.5). VMware’s multiple is reasonable in the context of its growth prospects.
Will VMware Go Down In 2019 (Should You Sell)?
Market volatility, slowing growth in China and emerging markets, ballooning U.S. budget deficits, political gridlock in Washington, DC, falling energy and commodity prices, high debts levels around the world: triggers for a correction lurk everywhere.
The latter part of 2018 was ugly for investors and further sell-offs are likely this year. Flashy “story stocks” in the tech sector are among the most vulnerable.
Overvalued momentum stocks, especially the mega-cap technology stars, are losing steam. They’re ceding their leadership position to value stocks in sectors more appropriate for the late stage of a recovery, such as industrials, consumer staples, energy, utilities, and health care.
During this protracted bull market, many investors have grown complacent. When volatility returns, they get taken by surprise and run for the exits. VMware could get caught in the stampede.
Overall VMware Forecast And Prediction For 2019
The right technology stocks offer a combination of growth and safety, for investors worried about today’s market conditions but still eager to invest. The trick is to find reasonably valued tech stocks that aren’t poised for a correction.
It’s also important to find a company plugged into long-term secular trends that will unfold regardless of economic ups and downs or mercurial policy changes from the federal government.
VMware meets all these criteria. It’s a solid tech stock that should weather the turbulence I expect in 2019.
The average analyst expectation is for VMware to post year-over-year earnings growth of 20% in the current year. As overall corporate earnings growth dramatically slows this year, that’s a rate of growth you should find appealing.
John Persinos is the managing editor of Investing Daily.