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VMware stock price drifts as Broadcom’s $61bn takeover nears - is there value in VMW shares?

By Jenny McCall

14:02, 5 September 2022

A image of the VMware sign outside its headquarters
Last month VMware reported its second quarter earnings, which came in stronger than expected - Photo: Shutterstock.

Tech giant Broadcom Inc's (AVGO), acquisition of software company, VMware (VMW), which was announced on 26 May 2022 is getting closer to completion, but VMware’s stock price has been slipping. So, is there value in VMW shares?

Although no specific date has been agreed, the transaction is expected to be completed in Broadcom’s fiscal year 2023. The VMW share price has fallen by 4%, from $124 to $115 since the acquisition announcement was made in May.

Broadcom’s acquisition of VMware (VMW) was fully realised after Dell Technologies (DELL) spun off its stake in VMW back in November 2021.

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VMware (VMW) share price chart

Strong quarterly results

A provider of multi-cloud services for apps, VMW is to be acquired for $61bn (£50bn) on 25 May 2022, based on the closing price of Broadcom common stock.

In an interview, CEO Raghu Raghuram said he expected “a large chunk of VMware operations to continue as is”, adding that Broadcom would be making VMW “a flagship brand.”

With the acquisition underway but with VMW share price declining over recent weeks, investors may be asking if there is any value in VMware’s share price right now?

Well, there was some good news. On 25 August VMware reported its second quarter earnings results, which came in stronger than expected. The company reported a net profit for the quarter of $347m, this was a decline from the profit recorded last year. Revenue rose by just over 6% to $3.34bn.

“We are pleased with our performance in Q2. Our momentum continues next week at VMware Explore where we will showcase new innovative offerings while also highlighting how we are helping customers continue to transform their businesses,” said Raghu Raghuram, CEO, VMware

In addition, analysts polled by CNN business have offered a 12-month price forecast for VMW stock, it has a median target of $142.50 and a high estimate of $143.00, the median estimate represents a 24.05% increase from the current share price.

With that said, the VMW stock price this year has reached $136.85 and at its lowest point it sat at $91.53, so its share price has seen some significant price movements over recent months.

 

Analysts at the stock market group Simply Wall Street, assessed VMW stock back in May, to see if it was over or under valued.

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“Good news, investors! VMware (VMW) is still a bargain right now according to my price multiple model, which compares the company's price-to-earnings ratio to the industry average,” an analyst at Simply Wall Street said.

Using VMW's price-to-earnings ratio, analysts found that the stock's ratio of 23.48x is currently well-below the industry average of 41.56x. They also found that VMW stock price is ‘quite stable'.

“This could mean two things: firstly, it may take the share price a while to move closer to its industry peers, and secondly, there may be less chances to buy low in the future once it reaches that value. This is because the stock is less volatile than the wider market given its low beta,” analysts at Simply Wall Street said.

Analysts believe that VMW does have a positive outlook and it seems that this growth has not yet been factored into its share price.

Broadcom Inc's (AVGO) share price chart

Good and bad news

MarketBeat analysts have added some more good news to the mix for VMW stock by saying that despite the computing industry being an intense and competitive one, VMware (VMW) has carved out a “strong moat for itself” to help differentiate it from its competitors.

“The company is doing so through multi-cloud environments, which allow customers to maximize efficiency and cost savings without making compromises when it comes to security,” MarketBeat analysts wrote in note.

“The result is that VMware offers a 'full-stack solution' for its customers, which simplifies multiple services into one platform.”

Analysts at Zacks Research, offer some good and bad news. “Undoubtedly a major positive, VMware shares have provided investors with a rock-solid 2.7% return year-to-date, easily outperforming the general market.”

However: “Zacks Consensus earnings per share (EPS) estimate of $1.61 reflects an 8% drop in quarterly earnings year-on-year,” Derek Lewis from Zacks said.

Nevertheless, Zacks is still optimistic about the stock, stating that VMW has “posted market-beating returns not just year-to-date but also over the last month, indicating that buyers have been out in full force.”

Markets in this article

AVGO
Broadcom
157.47 USD
-3.21 -2.000%
VMW
VMware
142.17 USD
-4.25 -2.910%
DELL
Dell Technologies Inc.
125.87 USD
0.1 +0.080%

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