Morgan Stanley Resumes Coverage On VMware At Overweight

Morgan Stanley’s Keith Weiss believes VMware, Inc. VMW now has a product portfolio at a scale that could stabilize top line growth, with margins moving up, while the stock multiples are expected to move back in-line with the peer group.

Weiss re-initiated coverage of the company with an Overweight rating and price target of $86.

Attractive Valuation

“For much of the past three years, investor debate around VMware has centered on whether the company could produce an Act 2 of enough scale to offset the declines in the core server virtualization infrastructure business,” the analyst mentioned.

However, the uncertainty regarding the pending Dell-EMC Corporation EMC merger had clouded the fundamental debate over the past year.

Related Link: Trip Chowdhy: VMWare Is A $45 Stock

Now, with the peak uncertainty regarding the Dell-EMC deal behind us, having received shareholder approval on June 19, Weiss believes VMware’s fundamentals would present an attractive opportunity for investors at the current valuation levels.

Inflection Point

“The newer product categories such as AirWatch, NSX and vSAN have now reached sufficient scale to overcome the drag on overall growth from the maturing virtualization business, by our analysis,” Weiss stated.

Given that compute bookings now account for less than half the overall license bookings, the analyst believes the company has reached a key inflection point, and that overall license growth is poised to trend higher.

“Furthermore, a more disciplined approach to opex/capex investments, $1.2 billion in planned share repurchases through the end of 2016 and the end of the downward estimate revision cycle creates a favorable backdrop for management to exceed consensus margin/EPS expectations in the quarters ahead,” the analyst added.

At time of writing, VMware was up 1.06 percent, trading at $72.31, shortly after Monday's opening bell.

Did you like this article? Could it have been improved? Please email feedback@benzinga.com with the story link to let us know!