VMware Shares Have 18% Upside

The survey results indicate that the activity was probably a little 'ahead of the plan in the first quarter. We think that the feeling on the street is very cautious about VMware and any increase (at constant exchange rates), could be a positive catalyst for improving sentiment. The migration of workloads to the cloud is a risk, but also an opportunity for VMware to bridge over the existing data centers to new cloud-based workloads.

Our vision began to move, thinking that the market is evolving in a way that can be more positive. Separately, the imminent end of the life of Microsoft (MSFT) Windows Server 2003 in the month of July should be a positive incremental replacement as these servers are likely to be virtualized.

Our dealer quarterly survey has been encouraging, with 28 of the 30 retailers surveyed to answer questions on VMware, with 54% of the first floor and 89% at or ahead of plan for the quarter. (Note, this is mostly value-added resellers (VARs) US and probably not to acquire enterprise license agreement (ELA) largest business deal.) Directionally, we saw this as encouraging.

We have lowered the estimates March 18 for the universe of coverage software to reflect the changes resulting from the headwinds stronger dollar in the quarter, then our estimates for VMware are a bit 'below the road.

It is estimated that 75% - 80% of servers are virtualized and this probably will expand to 85% - 90% by the end of 2016. So while the penetration of the product main server virtualization vSphere is high, only about 14% of the market had been penetrated with the management tools to the end of 2014. As more new workloads moving to the cloud, this is not good for the vSphere virtualization product, but should be positive for the management tools that help bridge the data center to the cloud (hybrid environments).

Shares trade at 18.1 times our calendar 2016 estimated earnings per share of $ 4.44 (or 15.9 times ex cash) and 11.8 times our calendar 2016 estimate of unlevered free-cash-flow. After several years of declining cash flow, we think 2016 will show growth as some unusual elements are no longer an obstacle.