The stock of VMware (NYSE:VMW, 30-year Financials) gives every indication of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $153.94 per share and the market cap of $64.5 billion, VMware stock appears to be modestly undervalued. GF Value for VMware is shown in the chart below.
Because VMware is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 12% over the past three years and is estimated to grow 8.49% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. VMware has a cash-to-debt ratio of 0.80, which is worse than 72% of the companies in Software industry. The overall financial strength of VMware is 5 out of 10, which indicates that the financial strength of VMware is fair. This is the debt and cash of VMware over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. VMware has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $11.8 billion and earnings of $4.87 a share. Its operating margin is 20.65%, which ranks better than 88% of the companies in Software industry. Overall, GuruFocus ranks the profitability of VMware at 9 out of 10, which indicates strong profitability. This is the revenue and net income of VMware over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of VMware is 12%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth rate is 16.5%, which ranks in the middle range of the companies in Software industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, VMware's ROIC was 7.76, while its WACC came in at 6.94. The historical ROIC vs WACC comparison of VMware is shown below:
Overall, VMware (NYSE:VMW, 30-year Financials) stock appears to be modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about VMware stock, you can check out its 30-year Financials here.
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