A Cheaper Way To Play VMware

| August 29, 2011 | 0 Comments

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.

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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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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