Vivek Kumar
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Morgan Stanley in its latest research note said their channel work on the California-based tech giant VMware pointed towards sequential improvement in the fourth quarter and similar expectations for the first quarter, though macro pressure still lingers.

On Thursday, Palo Alto cloud computing and software company is widely expected to report EPS of $2.05 per share in the fourth quarter. That was in line with Morgan Stanley’s forecasts of $2.05 per share.

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The investment bank forecasts a total revenue of $3.23 billion, up 5.1% year-over-year, in line with the market consensus estimates of +5% y/y growth. Morgan Stanley forecasts EBIT of $1.09 billion (33.6% margin) to round out FY21 at $3.74 billion (32% margin), in line with guidance and consensus.

“Beyond an improving top line, however, the stock performance will likely be tied to two other factors: 1) margins – preliminary guidance suggesting margin compression of 4% points YoY in FY22, therefore heavily pressuring near-term EPS growth; and 2) management – with CFO Zane Rowe as interim CEO, VMware‘s Board is currently searching for a permanent replacement after Pat Gelsinger’s departure. As such, even with shares at 20x CY22e P/E, trading at a meaningful discount to the large-cap average of 29x, we remain ‘Equal-weight’ on these uncertainties,” wrote Keith Weiss, equity analyst at Morgan Stanley.

VMware’s shares, which declined about 8% in 2020, had risen over 3% so far this year. The stock closed 1.54% higher at $144.68 on Friday.

Seventeen analysts who offered stock ratings for VMware in the last three months forecast the average price in 12 months at $167.21 with a high forecast of $199.00 and a low forecast of $145.00.

The average price target represents a 15.57% increase from the last price of $144.68. From those 17 equity analysts, nine rated “Buy”, eight rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $156 with a high of $193 under a bull scenario and $94 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the IT company’s stock.

Other equity analysts also recently updated their stock outlook. Mizuho cut their target price on shares to $147 from $152 and set a “neutral” rating. Cleveland Research lowered shares to a “neutral” rating from a “buy”. Barclays dropped their price target to $180 from $187 and set an “overweight” rating. At last, Piper Sandler increased their price objective to $179 from $170.

“Improved Positioning Largely Priced In: Over the last several years, fast-growing ‘Act 2’ product categories including vSAN, NSX and EUC have scaled to drive a better growth profile at VMware. However, the necessity of further investment to improve secular positioning weighs on op margins and EPS growth leaving the stock expensive on a PEG basis,” Morgan Stanley’s Weiss added.

“With CBLK and PVTL acquisitions closed, we wait for evidence of VMW‘s expansion strategy into security and app dev to take hold, as early partner conversations have been positive. Current trade of 20x CY22 P/E is a discount to the large-cap SW average/median of 29x/31x, justified considering VMW‘s on-premise exposure and margin pressure in FY22.”

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