A Cheaper Way To Play VMware
The Dynamic Wealth Report
August 29, 2011
by Robert Morris, Editor
It looks like the US East Coast dodged a bullet. Hurricane Irene
battered the area with wind, rain, and floods over the weekend. And while
the storm left many dead and billions in property damage, it failed to
cause the catastrophe many experts were predicting.
Nearly everyone's breathing a sigh of relief that Irene didn't turn into
another Katrina.
Nevertheless, many areas are still underwater this morning and millions
are without power. Our hearts go out to everyone affected by this
horrible storm.
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One bit of good news is Wall Street opened normally for trading
this morning. Many feared the area would be underwater, but it appears
to have survived relatively intact. However, with many commuter trains
shut down, we'll probably see lower trading volumes today.
Speaking of trading...
VMware (VMW) is jumping more than 2% in early trading. Investors are
snapping up shares after an analyst's upgrade last Thursday. In fact,
the shares are up 8.5% since the upgrade was announced.
Traders are excited about the analyst's claims VMW offers investors
"multiple ways to win". And they're licking their chops over the
analyst's $100 price target for the shares.
Who is VMware?
They provide virtualization and virtualization-based cloud
infrastructure solutions. In plain English, the company's virtualization
software helps companies make a live migration of actively running
virtual machines across servers and storage locations without disruption
or downtime.
With so many companies making the transition to cloud-based
applications, demand for VMW's software is through the roof. You don't
have to look any further than the company's recent second quarter
earnings to see how well they're doing.
Revenue jumped 37% year over year to $921 million. Net income increased
by an impressive 65% to $235 million. And earnings soared 62% to $0.55
per share.
What's even more impressive is the company's ability to generate cash.
Over the past 12 months, VMW has produced free cash flows of $1.6
billion... a whopping 56% increase.
Sounds like a great stock to own.
But there is one problem... valuation. The secret's been out about
VMware for some time. The stock's more than quadrupled since the market
bottomed in March 2009.
And at a recent price of $87.33, the shares are trading for a hefty 42x
their 2011 earnings estimate of $2.08 per share. That's a lofty
multiple, even for a company hitting on all cylinders like VMW.
The good news is there's a less expensive way to profit from VMware's
phenomenal growth.
The secret is to grab shares of EMC Corporation (EMC), which is trading
for just $22 per share.
EMC is a global leader in enterprise storage systems and software. Their
hardware and software solutions help store, manage, and easily access
the huge amounts of data generated by large companies.
You may remember EMC from the tech bubble days of the late 1990s. The
stock was a Wall Street darling along with Intel (INTC),
Microsoft
(MSFT), and Cisco Systems (CSCO). At its peak, EMC hit nearly $105 per
share and sported a market value of over $216 billion.
Of course, the shares are worth far less these days after the bursting
of the tech bubble. While EMC has recovered some of what they lost, the
company's worth a more reasonable $45 billion. In fact, the stock's a
good bargain at current prices.
With a P/E of just 14.7x the 2011 earnings estimate of $1.50 per share,
EMC is trading at a nice discount to their projected growth rate. Analysts are expecting the company to grow earnings by 16% annually
over the next five years.
So, the stock's offering a 12% discount to the projected growth rate.
While it's always great to pick up shares of a blue chip technology
company at a discount, that's not why I'm so excited about EMC. You see,
EMC has hitched their wagon to high-flying VMware.
What I mean is, EMC owns about 80% of VMW.
They realized early on VMW would be a leader in the mass migration to
cloud computing. They bought the company when it was still privately
held back in 2004 for just $625 million. Then in 2007, EMC spun-off
about 10% of VMW in an IPO that raised nearly $1 billion.
And while VMW has taken off over the past few years, EMC is committed to
maintaining an 80% ownership stake. In fact, EMC has said publicly
they're committed to buying shares of VMW on the open market to achieve
this goal. And that's exactly what they've been doing.
Clearly, EMC management sees a ton of upside in VMW, even with the
company's current lofty valuation.
The strategy is simple.
If you want to participate in VMW's stunning growth without the hefty
price tag, grab shares of EMC. At current prices, EMC's stake in VMW is
worth about $14 per share of EMC. That means, you can get the rest of
the company for just about $8 per share.
Now that's a great bargain. For just $22 per share, you get a big chunk
of skyrocketing VMW and you'll own a blue chip technology stock
generating annual revenue and earnings growth in the high teens. Take a
closer look at EMC for your own portfolio today!
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