There’s no stopping the VMware Inc (NYSE:VMW) growth train, with analysts forecasting high top-line growth in the near future. I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.
Firstly, a quick intro on the company – VMware, Inc. provides compute, cloud, mobility, networking, and security infrastructure software to businesses in the United States and internationally. Started in 1998, it operates in United States and is recently valued at US$53.45B.
There’s no doubt VMW is delivery on its promises, with a soaring annual revenue growth of 33.10% . Over the past five years, revenue has increased by 11.70%, parallel with larger capital expenditure, which most recently reached US$263.00M. An expected return on investment of 27.69% over the next three years is a result of VMW’s reinvestment into the business, according to the consensus of broker analysts covering the stock. Net income is expected to reach US$1.71B in the upcoming year, outpacing the industry average growth rate of 15.36%. Furthermore, over the next five years, earnings are expected to rise at an annual rate of 24.39% on average. These numbers tell me that VMW has a robust history of delivering profit to shareholders, with a disciplined approach to reinvesting into the company, and a bright future relative to its competitors in the industry.
VMW’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. VMware has an enviable balance sheet, with high levels of cash generated from its core operating activities (0.76x debt) able to service its borrowings. Although its debt level relative to equity is high at 54.45%, which has been increasing over the past five years from 7.75%, it generates income from lending its cash which, in turn, is able to cover its annual interest payment to its debtors. Management exhibits strong capacity to effectively utilize capital, increasing my conviction of the sustainability of the business going forward. VMW has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. A reason I like VMW as a business is its low level of fixed assets on its balance sheet (5.21% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. VMW has virtually no fixed assets, which minimizes its downside risk.
The current share price for VMW is US$137.54. With 405.29 million shares, that’s a US$53.45B market cap – which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of 9.55% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$2.86B, the target price for VMW is US$107. This means the stock is currently trading at a massive premium of 29.04%. Also, comparing VMW’s current share price to its peers based on its industry and earnings level, it’s overvalued by 184.79%, with a PE ratio of 98.15x vs. the industry average of 34.46x.
VMW has a strong investment case. I’m attracted to the company because of its strong fundamentals – financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.