Shares of cloud software and services company VMware Inc. (VMW, Financial) are down nearly 9% since last Friday. The Palo Alto, California-based company reported its second-quarter earnings results after the market closed on Aug. 22, beating analysts' revenue and earnings expectations for the fourth consecutive quarter.
Surprisingly, the company’s stock plunged the following day and has failed to recover. Shares traded at about $148 prior to the earnings announcement. Now, it is trading at about $132 per share.
Earnings overview
In the most recent quarter, VMware reported earnings of $1.60 per share, topping estimates of $1.55 and improving from $1.54 in the prior-year quarter. Revenue of $2.44 billion also surprised analysts, beating expectations by 0.58%.
The company also announced two acquisitions that could shape its immediate future in cloud security software. The deal with Carbon Black (CBLK, Financial), a security software company that focuses on “cloud-native endpoint protection,” will extend VMware’s service offering in cloud security through Amazon Web Services and Google Cloud services.
Based on data from the most recent quarter, VMware is now available in 16 regions around the world via AWS following the addition of Seoul, South Korea and Sao Paulo, Brazil.
Last month, Google Cloud and VMware also announced Google Cloud VMware Solution by CloudSimple, which provides customers with the option to run their workloads on-premises, in the cloud or in a hybrid architecture on the Google Cloud Platform. This widens the company’s addressable market at a time when cloud computing services and software for small businesses and startups are becoming more popular.
VMware also announced it had reached a definitive merger agreement with Pivotal Software (PVTL, Financial) that is valued at $2.7 billion. The deal extends the company’s product offering and global reach.
The company has aggressively invested in inorganic growth recently through several similar acquisitions. These include Avi Networks, which will play a crucial role in bringing the public cloud to the entire data center, Bitfusion, extending its GPU visualization hardware product portfolio, and Uhana, which provides more avenues for VMware to explore innovative ways of utilizing real-time artificial intelligence and deep learning technologies for improved business experiences.
These acquisitions, along with the partnerships with Alphabet Inc.'s (GOOG, Financial) (GOOGL, Financial) Google and Amazon.com Inc.’s (AMZN, Financial) web services, VMware appears to be well-positioned to capitalize on the expected growth of the cloud computing market, with key catalysts coming from the internet of things and big data.
From a valuation perspective, VMware's price-earnings ratio has dropped significantly since last week. At the current level of 8.83 times trailing earnings, VMware now has one of its lowest price-earnings ratios ever and also compares positively to its peers in the technical systems and software industry.
The company could, however, experience a slowdown in earnings per share growth over the next several years since the forward price-earnings ratio is now around 18.
VMware is expected to experience steady top-line growth for the foreseeable future, but analysts expect the bottom line to slow during 2020 with full recovery not expected until 2022. This slowdown will come as the company integrates the newly acquired businesses. However, exponential growth is expected thereafter.
Therefore, the stock’s recent pullback might be an opportunity to add to current holdings, though it might be a while before the real benefits are realized.
Disclosure: No positions in the stocks mentioned.
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