VMware Has Hit A 'Tipping Point,' Analyst Upgrades

Analysts at Bank of America turned bullish on VMware, Inc. VMW Friday as the company's second-quarter earnings report and conference call reinforced the company's ability to transition its business. The firm's Kash Rangan upgrades VMware's stock rating from Neutral to Buy with a price target boosted from $108 to $120.

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VMware could see success in its transition from an upfront business model toward a recurring subscription model across the entire product portfolio, including NSX, vSAN and possible ESX as a service, Rangan commented. Perhaps more important, this trend will also be accelerated by VMW Cloud on AWS.

Cloud transitions resulted in a superior valuation for other tech companies as investors tend to value recurring revenue streams as superior versus a license revenues mix, Rangan explained. For instance, as VMWare's cloud transition accelerates the stock's valuation could be similar to that of Adobe Systems Incorporated ADBE where the Creative business and digital marketing businesses are valued separately.

"We believe VMW has hit a tipping point whereby licenses from new and faster growing products such as NSX, vSAN, EUC are ~50% of license revenues and will increasingly inflect growth and plant it more firmly in double-digit territory," the analyst concluded. "This would potentially reduce license cyclicality."

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Benzinga's Top Upgrades, Downgrades For August 25, 2017 _______ Image Credit: "A section of the VMware headquarters campus" By BrokenSphere - Own work, CC BY-SA 3.0, via Wikimedia Commons