The Dell/EMC Deal Still An Overhang For VMware

• Shares of VMware, Inc. VMW have declined 43.29 percent over the last six months, reaching a low of $48.79 on January 25.
• Daniel H. Ives of FBR & Co. has maintained a Market Perform rating on the company, while lowering the price target from $73 to $59.
• Ives mentioned that the announcement of the deal between Dell Inc. DELL and EMC Corporation EMC has been a “black cloud” over VMware’s stock.

Analyst Daniel Ives explained that the stock had declined about 40 percent since the announcement of the deal, given investor fears regarding a “a tracking stock overhang and fundamental disruption from the deal.”

However, Ives also mentioned that the robust December quarter results was a “a small step in a positive direction,” with VMware beating the consensus forecasts across the board, driven by seasonally strong deal flow into the year end.

According to the FBR report, “While guidance for 2016 from a headline perspective looks very soft, it is mostly Virtustream-related as this joint initiative was previously scratched and taken off VMware's books.”

“Ultimately, while VMware has some headwinds ahead, we believe investors should breathe a sigh of relief after last night's quarter/guidance,” Ives stated.

The 1Q16 total revenue and EPS estimates have been reduced to reflect the loss of the Virtustream contribution, along with bookings timing and company-specific headwinds.

For FY16, the total revenue estimate has been lowered, while the EPS estimate has been raised to reflect a ramp in profitability and margins due to the model mix shift.