VMware's (VMW) Price Target Reduced to $70 at Deutsche Bank
Deutsche Bank maintained a Hold rating on VMware (NYSE: VMW) and reduced its price target to $70.00 (from $80.00). Comments follow disappointing Q3 results and guidance.
Commenting on developments and headwinds facing the company, analyst Karl Keirstead said, "The list of pressures is long: 1. customers are pausing while they assess if/how they will transition to cloud IT infrastructures, 2. deal delays given uncertainty about VMW’s ownership changes, 3. weakness in China, Brazil, Russia, 4. the fast-growing EUC segment and AirWatch decelerated, 5. the mix shift to ratable/subscription revs (6% today) will knock 3%+ from 2016 total revs growth and even more from license growth and 6. VMW is absorbing VirtuStream from EMC, causing a big 2016 hit to non-GAAP OM (guide is now 28%, down from 32%) and FCF (we’re lowering our estimate to $1.5b from $1.9b). The list of good news was shorter and includes reaffirmed guidance for 10%+ growth in OCF in 4Q15 and 15%-20% OCF growth in 2016 and solid metrics for NSX (100%+ license bookings growth, 900 customers)."
Keirstead added, "The large infrastructure software, hardware and storage vendors are seeing a mounting and massive impact from the shift to the AWS/cloud model and we have little confidence that the vCloud/VirtuStream combo will stem this pressure and become a “multi-billion” and profitable asset over the mediumterm. Absorbing VirtuStream completely undermines the 2016 FCF recovery story, VMW acknowledges that EMC-Dell merger uncertainties may continue to weigh on large deal momentum and VMW is also facing a secular shift to open source alternatives (KVM, OpenShift, Docker). Among the large-cap software names, we prefer the set-up for MSFT and CRM, both Buy-rated."
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Shares of VMware closed at $68.76 yesterday.