Summary
VMware has huge growth opportunities in the end-user computing space.
VMware Identity Manager, the company’s most recent product in this space, is expected to drive solid top-line growth going forward.
The stock is attractively valued at the current price level, and offers excellent investing opportunity post the massive correction in stocks.
I'm a long-term fan of VMware (NYSE:VMW), and with the company's near-term earnings visibility becoming clearer, I believe the stock is set to rise significantly. Among VMware's three strategic businesses - hybrid cloud, software-defined data center and end-user computing - the end-user computing segment has the maximum growth potential. This segment, along with VMware's enterprise mobility suite AirWatch, delivered encouraging earnings performance in the second quarter when overall license bookings grew more than 30% year-over-year.
VMware's Opportunities in End-User Computing
Enterprise Mobility Management (EMM) is a fast growing space where the maximum potential of end-user computing can be exploited. VMware's focus is on four areas in end-user computing - application delivery, datacenter and device management, low-cost storage and cloud delivery. With the bring-your-own-device (BYOD) trend continuing in full force, enterprises are under tremendous pressure to keep their data safe, which is an excellent opportunity for VMware to grow revenue by offering end-user computing solutions with enhanced security features. I believe VMware's acquisition of AirWatch in February 2014 and most recently its launch of VMware Identity Manager have made the company one of the most sought after vendors in EMM. In the second quarter VMware saw its AirWatch license bookings grew over 60% year-over-year on a constant currency basis. According to Gartner:
AirWatch is a good fit for organizations that need a comprehensive EMM feature for a broad range of platforms, and AirWatch's strengths fall under its ability to make large-scale deployments across most vertical markets.
Recently VMware introduced VMware Identity Manager, an identity-as-a-service application which can provide a unique mobile cloud identity management and security platform. With Identity Manager, VMware's competitive advantage over established players like IBM (NYSE:IBM) and emerging players like Microsoft (NASDAQ:MSFT) in EMM will certainly get stronger. Why? Because when Identity Manager will be combined with AirWatch, it will create device identities through a single sign-on process which an enterprise can bind to users for optimal use of unlocked devices across both iOS and Android platforms. This will help enterprises get rid off passwords which in turn will substantially reduce human errors and enhance security. The introduction of Identity Manager is expected to boost the demand for VMware's products in all four areas of end-user computing, as mentioned above.
Other Growth Drivers
In addition to end-user computing, software-defined data center and hybrid cloud are also expected to drive VMware's revenue growth, although a bit modestly compared to end-user computing.
In software-defined data center, VMware's NSX overlay architecture provides customers cloud computing which can work on almost all networking hardware. Over the past twelve months, the number of NSX paying customers has increased substantially, and reached over 700 from 150 a year ago. However, since the product was launched just two years ago, the initial growth rate might not reflect its actual growth potential, which could be a bit softer especially with competitors like Juniper Networks (NYSE:JNPR) and Alcatel-Lucent (NYSE:ALU) backed Nuage Networks already offering similar technology. Further, in OpenStack Cisco (NASDAQ:CSCO) and IBM offer products that directly compete with NSX.
In hybrid cloud, VMware's vCloud Air and vCloud Air Network of service provider partners are continuing to deliver satisfactory growth. In relation to hybrid cloud, the company's Virtual SAN customers have grown to over 2,000 in the second quarter, compared to just 1,000 in the fourth quarter of last year. However, the hybrid cloud space being extremely competitive, the growth prospects are limited. Therefore VMware is expanding its hybrid cloud product offerings globally, specifically in the high growth Asia-Pacific region.
Valuation Looks Attractive
With the growth drivers mentioned above, I believe both VMware's revenue and earnings should grow at a CAGR of around 15% for the next two years. The company announced that its full-year 2015 top-line would come between $6.575 billion and $6.685 billion, and EPS between $3.97 and $4.03. For full-year 2016, top-line is expected to be around $7.5 billion or $17.77 per share and earnings should be around $4.60 per share. Currently the company is trading at a one-year forward price to sales multiple of 4.5x, and at a one-year forward price to earnings multiple of 17.7x, both of which indicate that the stock is attractively valued with significant upside potential in the long-term.
Conclusion
I expect VMware Identity Manager will emerge as a game-changer product not only for the company, but also for the end-user computing space in general. The space has tremendous growth opportunities since it is relatively new and continuously evolving. VMware is well-positioned to capitalize on the opportunities. The stock offers an excellent investing opportunity post the massive correction in the stock market in the past one month.
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