VMware, Inc. (VMW) PT $86 On Slowing Growth: Cantor

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VMware, Inc. (NYSE:VMW) shareholders have had a poor year in 2013. Shares have fallen by more than 5% while wider indices surged since January 1. Cantor Fitzgerald initiated coverage on the information technology company yesterday and rated the stock a Hold with a price target of $86. Shares in the company opened at $88.74 this morning.

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Brian White, the analyst who authored the Cantor Fitzgerald report, said that though the company has a great track record of growth in both revenue and earnings, growth is likely to slow in the future. The slowing growth has resulted in a change in the company’s vision for the future. The transition is going to take time, however.

VMware transformation

The transformation referenced by Mr. White in the report is the VMware, Inc. (NYSE:VMW) change from server visualization software dominating its business to what the company calls the “software-defined data center.” The venture is an interesting idea, but it will take time before it can take off as a business.

VMware, Inc. (NYSE:VMW) is augmenting its software-defined data center with two more businesses, end-user computing virtualization, and the hybrid cloud. Those three projects form the basis of the firm’s strategy going ahead. White expects the total addressable market for the software-defined data center to be $28 billion.

The software-defined data center is an extension of the server visualization software that has formed the basis of VMware, Inc. (NYSE:VMW) business for years. The concept will allow a server center to manage itself given the right parameters, making maintenance less costly, and servers more efficient. The software-defined data center will also make server recovery easier according to VMware.

VMware valuation

Brian White values VMware, Inc. (NYSE:VMW) at 20 times the company’s expected 2014 earnings. that gives the firm a twelve month price target of $86 and a Hold rating. VMware, or at least the version of the company described in this report, is still doing well, but it’s next wave of growth will be a little while coming.

That means that White believes shares will stay steady for the next year as earnings grow. This will allow the company’s valuation to fall from its current multiple of close to 50 and down to a level where investors can feel safe investing in the company’s future once again.

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