VMware Inc (VMW, Financial) experienced a daily loss of 7.62% and a 3-month gain of 2.96%, with an Earnings Per Share (EPS) of 3.31. The question arises: is the stock modestly overvalued? This comprehensive analysis delves into the company's valuation, providing insights into its financial health and growth prospects. Keep reading to understand VMware's intrinsic value better.
Company Introduction
VMware Inc (VMW, Financial), an industry titan in IT infrastructure virtualization, became a stand-alone 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. The company, based in Palo Alto, California, 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 $165.25 per share, with a market cap of $71.40 billion, VMware's stock appears to be modestly overvalued compared to its GF Value of $135.93. This discrepancy paves the way for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. 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.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Given its current price and market cap, VMware (VMW, Financial) appears to be modestly overvalued. Consequently, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's essential to review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. VMware has a cash-to-debt ratio of 0.61, ranking worse than 72.66% of 2729 companies in the Software industry. Based on this, GuruFocus ranks VMware's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. VMware has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $13.60 billion and Earnings Per Share (EPS) of $3.31. Its operating margin is 14%, which ranks better than 80.22% of 2760 companies in the Software industry. Overall, the profitability of VMware is ranked 9 out of 10, indicating strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of VMware is 7.2%, which ranks worse than 52.17% of 2394 companies in the Software industry. The 3-year average EBITDA growth rate is 10.6%, which ranks better than 52.21% of 1988 companies in the Software industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, VMware's ROIC is 5.01 while its WACC came in at 7.44.
Conclusion
In conclusion, the stock of VMware (VMW, Financial) shows every sign of being modestly overvalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 52.21% of 1988 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.
