Even After A Yearlong Run, KeyBanc Says VMware Is Attractively Valued

After strong performance throughout 2017, VMware, Inc. VMW remains well-positioned to continue benefiting from favorable industry trends, which bodes well for the stock's prospects in 2018, according to KeyBanc Capital Markets.

The Analyst

KeyBanc Capital Markets' Alex Kurtz upgraded VMware's stock rating from Sector Weight to Overweight and set a $142 price target.

The Thesis

VMware's business showed signs of strength throughout 2017 despite a rise in demand for containers and public cloud adoption as longer-term alternative platforms, Kurtz said in a note. (See Kurtz' track record here.) 

Specifically, the company showed strong renewal rates, especially with its largest enterprise licensing agreements, the analyst said. 

While the company's prospects for the coming year remain strong, the stock's price may not fully reflect that, according to KeyBanc. 

Shares of VMware are trading near the midpoint of its historical EV/NTM FCF ranges, Kurtz said. A "bull case" scenario price target of $172 implies blended revenue growth of 12 percent in fiscal 2019, with a 36-percent free cash flow margin and a 20x multiple, he said.

By comparison, company peer Red Hat Inc RHT has a 27.5-percent free cash flow margin and 15.4-percent revenue growth outlook, Kurtz said. 

Price Action

Shares of VMware were trading higher by nearly 2 percent ahead of Monday's market open and are higher by nearly 60 percent since the start of 2017.

Related Links:

BMO Capital Upgrades VMware 'At Long Last,' Says Shares Can Move Higher

Why VMware Shares Are A Buy