VMW - VMWare

[RuleNumberOne]

This went down after decent earnings, is available close to the 52-week low at a P/E of 20.

 

Revenue growth has been around 12-13% recently.

 

Has a very wide moat and is benefiting from the cloud revolution over the last few years. Can't think of a better bet and wider moat in the private cloud and hybrid cloud space.

 

Forecast revenue for this fiscal year: $10 billion

Forecast EPS for this fiscal year: $6.54

The profit forecast for this year is $2.73 billion.

 

Unlike the SaaS stocks, this is a deep-tech company with a wide-moat and wide profit margins. Probably that is why it is out of favor...

[movys]

Agree - but by buying it through DELL you get it at such a massive discount that you could be way off on your assumptions about VMW and still make money.

 

The magnitude of the discount is remarkable given how liquid these companies are.

[RuleNumberOne]

Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.

 

VMW is a software monopoly with very wide moat and profit margins.

 

Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.

 

 

Agree - but by buying it through DELL you get it at such a massive discount that you could be way off on your assumptions about VMW and still make money.

 

The magnitude of the discount is remarkable given how liquid these companies are.

[Gordon Gecko]

Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.

 

VMW is a software monopoly with very wide moat and profit margins.

 

Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.

 

 

They grew EBITDA ex-stock based comp about 12% on a TTM basis over the past year despite a pretty poor ISG print in the last quarter and depending on how you want to measure it, reported a couple billion in FCFE on an implied market capitalization of -$12Bn. Every dollar they earn and use to delever increases your ownership of VMW relative to the creditors. Plus, at DELL level, you're aligned w/ MSD himself. That matters.

[RuleNumberOne]

Said another way, I wouldn't be surprised if Dell's ex-VMW revenue is halved in 10 years, while VMW's revenue triples over the same time.

 

Their "Client" revenue is larger than ISG and the moat is even narrower. If they were category leaders in any of those areas, I would feel better. Investing in categories where they are not the leader makes me sleepless.

 

Dell's EV = 71B, VMW stake =$41B. Over the long run, I don't feel safe paying 30B for the ex-VMW business.

 

 

Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.

 

VMW is a software monopoly with very wide moat and profit margins.

 

Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.

 

 

They grew EBITDA ex-stock based comp about 12% on a TTM basis over the past year despite a pretty poor ISG print in the last quarter and depending on how you want to measure it, reported a couple billion in FCFE on an implied market capitalization of -$12Bn. Every dollar they earn and use to delever increases your ownership of VMW relative to the creditors. Plus, at DELL level, you're aligned w/ MSD himself. That matters.

[Gordon Gecko]

Said another way, I wouldn't be surprised if Dell's ex-VMW revenue is halved in 10 years, while VMW's revenue triples over the same time.

 

Their "Client" revenue is larger than ISG and the moat is even narrower. If they were category leaders in any of those areas, I would feel better. Investing in categories where they are not the leader makes me sleepless.

 

Dell's EV = 71B, VMW stake =$41B. Over the long run, I don't feel safe paying 30B for the ex-VMW business.

 

 

That would be an implied -7% CAGR on CSG and ISG. Possible. I can't see 10 yrs. out. But it would be weird given positive growth in both segments since EMC close plus consolidating industries. It would be even weirder if that resulted in a similar cash flow decline.

 

And as an equity investor you are not paying for the $30b ex-vmw business... you are being paid $12bn. $46bn market cap of public subs - $34bn mkt cap DELL.

 

[RuleNumberOne]

The ISG and Client solutions revenue has too many strong competitors:

 

In PCs: Apple, Lenovo, HP, etc

In networking: Arista, Cisco, Juniper

In servers: IBM, HP

In storage: PSTG, NTAP, HP, IBM, startups

 

When such things go into decline, it won't be smooth. I mean the decline may start slow initially and then fall off faster. Because of the leverage, the equity will go down even faster.

 

But with VMW, there are no such worries, it is a pure software business where they have a monopoly.

 

I don't have much conviction in the ex-VMW business, it may or may not decline, but why take the chance?

 

Said another way, I wouldn't be surprised if Dell's ex-VMW revenue is halved in 10 years, while VMW's revenue triples over the same time.

 

Their "Client" revenue is larger than ISG and the moat is even narrower. If they were category leaders in any of those areas, I would feel better. Investing in categories where they are not the leader makes me sleepless.

 

Dell's EV = 71B, VMW stake =$41B. Over the long run, I don't feel safe paying 30B for the ex-VMW business.

 

 

That would be an implied -7% CAGR on CSG and ISG. Possible. I can't see 10 yrs. out. But it would be weird given positive growth in both segments since EMC close plus consolidating industries. It would be even weirder if that resulted in a similar cash flow decline.

 

And as an equity investor you are not paying for the $30b ex-vmw business... you are being paid $12bn. $46bn market cap of public subs - $34bn mkt cap DELL.

 

 

Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.

 

VMW is a software monopoly with very wide moat and profit margins.

 

Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.

 

 

They grew EBITDA ex-stock based comp about 12% on a TTM basis over the past year despite a pretty poor ISG print in the last quarter and depending on how you want to measure it, reported a couple billion in FCFE on an implied market capitalization of -$12Bn. Every dollar they earn and use to delever increases your ownership of VMW relative to the creditors. Plus, at DELL level, you're aligned w/ MSD himself. That matters.

[given2invest]

DELL is *by far* my largest position.

 

I will just opine in one way:  I have confirmed w/ DELL IR that the debt at HoldCo level is NOT pledged to VMW stake, besides a small margin loan.  Thus, even if you think DELL CORE is worthless, you can buy DELL and get VMW at a 25% discount.  They can spin it out tax free in Sept 2021. 

 

Of course, DELL CORE not worthless and worth much more than it's debt.  It throws off 3-4b of FCF a year.  I conservatively value it at ~50b or 6x EV/EBITDA.  Actual net debt is 33b or so (can't include financing debt DFS) leaving 17b in equity value or >$20 a share. 

 

Put all together, DELL today is 40-45% undervalued *just* using today's VMW price, which I think is also undervalued.  And you get to own it side by side with two of the greatest investors of all time, MSD and Silver Lake.

[SHDL]

I have confirmed w/ DELL IR that the debt at HoldCo level is NOT pledged to VMW stake, besides a small margin loan. 

 

Thanks very much for answering my burning question.

[Castanza]

 

But with VMW, there are no such worries, it is a pure software business where they have a monopoly.

 

 

The only real competition in this space is Kubernetes but that is still a ways off. Wouldn't be surprised to see Google come out with a strong competitor (possibly take back Kubernetes?) as they have been focusing hard on cloud and virtual platforms. I work with VM daily and at least in my specific industry I don't see us getting away from it anytime soon. It's unbelievably user friendly and simple to use. Either way VM isn't going anywhere for at least 5 years.

[given2invest]

And when I say 40-45% undervalued I mean it has to essentially *double* to get to fair value, today, and that's with a distressed VMW stock price that should be materially higher.

[oddballstocks]

How in the world do you get that they have a monopoly?

 

VMWare has 64% of the market with Hyper-V and KVM/Xen taking up the other 36%.

 

VMWare is a nice product, but Hyper-V is as well.  You get slammed on pricing if you run Windows on VMWare.

 

There's also QEMU and KVM, two Linux platforms that are really popular with companies that are latching onto the SDN notion.

 

Kubernetes isn't really a competitor.  Those containers have to run on bare metal somewhere, and most likely it's a hypervisor on bare metal.

 

Full disclosure, my company uses Hyper-V.  Considered VMWare but their cost scales quickly whereas with Windows it's linear.

 

 

Here's an example.  You want to run four instances of Windows on two servers.  Each server is dual processor.

 

vSphere license ($995 x4 = $3,980) You need to license each socket

vSphere support ($323 x4 = $1,292)

vCenter to manage it ($1,535)

Windows Server licenses ($900 x 2)

 

Total= $8,607  I selected the cheapest options possible.  If you jump to vCenter standard add another $5k, or vSphere enterprise another $2,500 per processor socket.

 

If you run Linux you save $1,800.

 

To do the same setup with Hyper-V is $1,800.

[Gordon Gecko]

4% growth ex-China

 

**shrugs**

[alwaysinvert]

DELL is *by far* my largest position.

 

I will just opine in one way:  I have confirmed w/ DELL IR that the debt at HoldCo level is NOT pledged to VMW stake, besides a small margin loan.  Thus, even if you think DELL CORE is worthless, you can buy DELL and get VMW at a 25% discount.  They can spin it out tax free in Sept 2021. 

 

Of course, DELL CORE not worthless and worth much more than it's debt.  It throws off 3-4b of FCF a year.  I conservatively value it at ~50b or 6x EV/EBITDA.  Actual net debt is 33b or so (can't include financing debt DFS) leaving 17b in equity value or >$20 a share. 

 

Put all together, DELL today is 40-45% undervalued *just* using today's VMW price, which I think is also undervalued.  And you get to own it side by side with two of the greatest investors of all time, MSD and Silver Lake.

 

I guess the question is what avenues of screwing you over do they have this time?

[given2invest]

4% growth ex-China

 

**shrugs**

 

lol.  you are getting paid to own something that generates billions in FCF after taking out the VMW stake. 

 

GETTING PAID

[given2invest]

that shitty DELL that nobody wants to be paid to own sure put up some nice #'s tonight

 

[RuleNumberOne]

The ex-VMW revenue was flat with a 10% operating margin.

 

Doesn't take much of a revenue decline in the ex-VMW revenue for the ex-VMW operating income to get close to zero. Servers and networking revenue was down 12%. Dell bought EMC just in time.

 

VMW operating margin = 31% (wide moat).

[given2invest]

You make no sense.  The gross margins are like 30%.  It's not a biz with tremendous operating leverage.  They can adjust the overhead for lower sales.  There are plenty of tech hardware businesses that have less than 90b in sales and are profitable!

[Gordon Gecko]

 

 

lol.  you are getting paid to own something that generates billions in FCF after taking out the VMW stake. 

 

GETTING PAID

 

I'm on your team here. I was comparing that to the -7% CAGR discussed before...

[scorpioncapital]

Why would dell spin off vmware (which would be a blessing for shareholders of dell) instead of sell small pieces of the shares to the public to increase the float and thereby favouring dell shareholders with incoming cash but not allowing them to cash out , so to speak, of dell stock ? I see small drip drip sales much more likely as they need cash for cash flow management. As such the benefit is only if you remain a Dell shareholder. Anyway to handicap if they will do a wholesale spinoff vs just sell the stake down slowly ?

[returnonmycapital]

Has anyone looked at arbitraging the DELL discount to VMW?

 

I don't think DELL is interested in selling VMW, they sell a lot of hardware to VMW customers. VMW is DELL's "get out of jail" card (a growing cash cow). Though they probably can't take it private as the VMW people like their VMW stock (options). 

 

I can see certain issues with a short VMW/long DELL position:

 

1) The odd special dividend paid out of VMW cash flow that will support its market price and the discount (but DELL can use that cash to pay down debt);

2) The consistent issuance of VMW stock (through option grants) diluting DELL's ownership over time and therefore reinforcing the discount; and

3) DELL's inferior balance sheet and, on a standalone basis, its operating metrics.

 

I wonder if that is worth $15 per share. 

[Jurgis]

I'm wondering if VMW is on the cusp of extended business loss. I'd think that moves to public cloud and containerization will hit their business. If company moves all their compute to Azure, GCP, or AWS, how much business does VMWare get? Similarly if business starts using containers, does that significantly decrease the number of VMW licenses needed? VMW seems to be trying to counteract that with Pivotal acquisition, but I'm not sure that's gonna work out well.

 

Anyway, I've been thinking that a while. There's also Barron's article about this two weeks ago - can't find online link.

 

Disclosure: I sold most of my VMW position. But hey BRK should just buy VMW.

[indirect]

Hello Jurgis, read Barrons article and wondering would you go short VMW?

 

https://www.barrons.com/articles/vmware-stock-cloud-containers-kubernetes-51574459195

[Jurgis]

Hello Jurgis, read Barrons article and wondering would you go short VMW?

 

https://www.barrons.com/articles/vmware-stock-cloud-containers-kubernetes-51574459195

 

I don't short.

 

Shorting VMW would be risky, since DELL could acquire the whole co.

[scorpioncapital]

Another concern , will it be like an IBM which has been a value trap not because it doesn't spinoff a ton of free cash flow but mostly because revenues are shrinking a tiny bit each year. A melting ice cube tends to tread water on valuation - at best. At worst it just shrinks.