Is VMware, Inc. (NYSE:VMW) Potentially Undervalued?

Today we're going to take a look at the well-established VMware, Inc. (NYSE:VMW). The company's stock saw significant share price movement during recent months on the NYSE, rising to highs of US$167 and falling to the lows of US$124. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether VMware's current trading price of US$126 reflective of the actual value of the large-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at VMware’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

See our latest analysis for VMware

What's the opportunity in VMware?

Good news, investors! VMware 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. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 25.56x is currently well-below the industry average of 55.07x, meaning that it is trading at a cheaper price relative to its peers. VMware’s share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. If you believe the share price should eventually reach its industry peers, a low beta could suggest it is unlikely to rapidly do so anytime soon, and once it’s there, it may be hard to fall back down into an attractive buying range.

What does the future of VMware look like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. However, with a relatively muted profit growth of 7.0% expected over the next couple of years, growth doesn’t seem like a key driver for a buy decision for VMware, at least in the short term.

What this means for you:

Are you a shareholder? Even though growth is relatively muted, since VMW is currently trading below the industry PE ratio, it may be a great time to accumulate more of your holdings in the stock. However, there are also other factors such as financial health to consider, which could explain the current price multiple.

Are you a potential investor? If you’ve been keeping an eye on VMW for a while, now might be the time to enter the stock. Its future profit outlook isn’t fully reflected in the current share price yet, which means it’s not too late to buy VMW. But before you make any investment decisions, consider other factors such as the track record of its management team, in order to make a well-informed investment decision.

So while earnings quality is important, it's equally important to consider the risks facing VMware at this point in time. In terms of investment risks, we've identified 2 warning signs with VMware, and understanding them should be part of your investment process.

If you are no longer interested in VMware, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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