VMware Inc (VMW, Financial) recently recorded a daily gain of 3.22% and a three-month gain of 13.17%. Despite these promising figures, the question remains: is the stock modestly overvalued? The company's Earnings Per Share (EPS) currently stands at 3.31. In this article, we will explore VMware's financial health and intrinsic value to answer this question. Let's dive into the analysis.
A Snapshot of VMware Inc (VMW, Financial)
VMware is an industry titan in virtualizing IT infrastructure. It became a standalone entity after spinning off from Dell Technologies in November 2021. The software provider operates in three segments: licenses; subscriptions and software as a service; and services. VMware's solutions are used across IT infrastructure, application development, and cybersecurity teams, and the company takes a neutral approach to being the cohesion between cloud environments. The Palo Alto, California, firm operates and sells on a global scale, with about half its revenue from the United States, through direct sales, distributors, and partnerships.
At its current price of $177.01 per share, VMware has a market cap of $76.40 billion. However, its fair value, according to the GF Value, stands at $135.94. This discrepancy suggests that the stock may be modestly overvalued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
VMware (VMW, Financial) is believed to be modestly overvalued based on GuruFocus' valuation method. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns.
Because VMware is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength of VMware
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. VMware has a cash-to-debt ratio of 0.61, which is worse than 72.68% of 2727 companies in the Software industry. GuruFocus ranks the overall financial strength of VMware at 5 out of 10, which indicates that the financial strength of VMware is fair.
Profitability and Growth of VMware
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. VMware has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $13.60 billion and Earnings Per Share (EPS) of $3.31. Its operating margin of 14% is better than 80.21% of 2759 companies in the Software industry. Overall, GuruFocus ranks VMware's profitability as strong.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of VMware is 7.2%, which ranks worse than 52.13% of 2396 companies in the Software industry. The 3-year average EBITDA growth is 10.6%, which ranks better than 52.17% of 1986 companies in the Software industry.
ROIC vs WACC Comparison
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, VMware's return on invested capital is 5.01, and its cost of capital is 7.42.
Conclusion
In conclusion, the stock of VMware (VMW, Financial) is believed to be modestly overvalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 52.17% of 1986 companies in the Software industry. To learn more about VMware stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
