VMWare Stock Looks Attractive After Earnings Miss/Market Meltdown

Stocks to buy

VMWare (NYSE:VMW) was trading at over $162 just over three weeks ago. Today, VMWare stock traded below $100.

VMWare stock a buy after earnings miss and market meltdown, but there is some risk

Source: Sundry Photography / Shutterstock.com

Like so many other stocks, VMW has been battered by a market meltdown triggered by the coronavirus correction and made worse by an oil price war. That’s not the whole story, though.

At the end of February, an earnings miss combined with lower-than-expected guidance for fiscal 2021 disappointed analysts and investors. The combination has resulted in a 32% drop in VMWare stock in just three weeks. Despite that slump, analysts continue to rate VMW as a “buy,” with the potential for significant upside over the next 12 months.

An Earnings Miss + Market Meltdown = Bad News for VMW

Investors in virtualization software company VMWare have been taking it on the chin since February began winding down.

VMWare has been pummelled by the same forces that have wreaked havoc on the markets in general: coronavirus and an oil price war. I don’t need to go into the details again here, but suffice it to say when the stock market posts record losses, VMW is going to feel the effect.

Making the situation worse for VMWare, the company posted its Q4 and fiscal 2020 earnings results on February 26. Q4 revenue was up 18.5% year-over-year, and for fiscal 2020 VMWare topped $10 billion in revenue for the first time ever. That was the good news. Analysts were less impressed by the quarterly earnings of $2.05 per share, which missed their estimates of $2.17 per share. In addition, the company issued disappointing earnings guidance for fiscal 2021.

The combination of the market meltdown and that earnings report has resulted in VMW shedding nearly a third of its value in just three weeks. 

Kubernetes Risk

The focus on VMW over the past few weeks has been the stock’s big dive. However, outside of the short term issues — reaction to Q4 earnings and wider market panic — VMWare faces a very real challenge. How this turns out is going to have a big impact on the company’s long term stock value.

VMWare’s virtualization software proved extremely popular for companies that needed to run multiple operating systems on a single computer. They share the physical computer resources, but each runs in isolation as a virtual PC. But the companies traditionally run these virtual servers on their own premises. 

The trend now is toward cloud computing, and so VMWare has been ramping up its efforts to deliver cloud-based solutions. Its partnership with Amazon’s (NASDAQ:AMZN) Amazon Web Services has borne fruit, but VMWare faces a big competitor. Kubernetes is a scalable, container-based solution.

Now open source, it was first developed by Alphabet’s (NASDAQ:GOOG, NASAQ:GOOGL) Google. Kubernetes lets companies deploy and manage their software in an isolated “container” in the cloud, at lower cost.

The trajectory of Kubernetes adoption is summed up by Alex Feltus, a professor in the Department of Genetics and Biochemistry at Clemson University.

“We believe that Kubernetes will be a common standard platform for data-intensive computing for many years, which allows us to focus our software engineering efforts on one architecture,” Feltus told CIO.

Bottom Line For VMWare Stock

Investment analysts remain upbeat about VMWare’s future, despite the growing challenge from Kubernetes and VMW’s miserable performance over the past three weeks.

Those surveyed by CNN Business have VMW rated as a consensus “buy.” Their median 12-month price target of $163.50 has 47% upside. That reflects a confidence that VMWare shares are going to recover and edge past levels hit prior to the February meltdown.

Still concerned that VMWare could continue to stumble? There is also an alternative option that will let you take advantage of VMW’s upside, at a lower risk.

InvestorPlace contributors Will Healy and Vince Martin have pointed out that since Dell (NYSE:DELL) owns an 81% stake in VMWare, an investment in Dell will reflect any gains by VMW while insulating your investment from the risks that VMWare faces.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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