Why VMware Shares Are A Buy

Barclays upgraded shares of VMware, Inc. VMW, based on four factors. With the firm now more comfortable with the long-term investment case for the company, it also raised its price target.

As such, the firm raised its ratings on the shares of the company from Equal Weight to Overweight and lifted its price target from $109 to $130.

Floating On The Cloud

Analyst Raimo Lenschow sees VWware as an emerging cloud story, much against popular notion that companies such as these will lose relevance due to workloads moving to public cloud.

The analyst believes the new cloud world will include hybrid environments, as companies are hesitant to re-platform their large legacy IT systems. Therefore, the analyst is of the view that the company will thrive on the hypervisor level, enabling it to upsell its next generation products.

Additionally, the partnership with Amazon.com, Inc. AMZN's AWS creates the opportunity for the company to provide cloud exposure, withoout the company having to defranchise itself.

Going Strong On Core Growth

Barclays expects the company to continue to benefit from workload growth, as it now appears that large parts of legacy IT will not be changed. The firm noted that it is evident from the management's recent action of raising its core compute growth assumptions to low-single digit growth, with flattish licenses, compared to the previous estimate of a decline in low-single digits, with licenses declining at a 10-percent rate.

Positive Portfolio Effect

The firm sees healthy potential to cross sell the newer products like NSX and vSAN. Creating a positive portfolio effect for total revenue growth, the firm noted that growth products now account for about 55 percent of the total bookings versus 44 percent three years ago.

"The AWS/VMware offering could eventually drive additional revenue as customers use VMware to migrate to the cloud via AWS," the firm said.

On valuation, the firm said VMware shares don't appear to be expensive relative to other established software names, given its growth and margin profile.