VMW - VMWare

[RuleNumberOne]

This went down after decent earnings, is available close to the 52-week low at a P/E of 20.

Revenue growth has been around 12-13% recently.

Has a very wide moat and is benefiting from the cloud revolution over the last few years. Can't think of a better bet and wider moat in the private cloud and hybrid cloud space.
 
Forecast revenue for this fiscal year: $10 billion
Forecast EPS for this fiscal year: $6.54
The profit forecast for this year is $2.73 billion.

Unlike the SaaS stocks, this is a deep-tech company with a wide-moat and wide profit margins. Probably that is why it is out of favor...

[movys]

Agree - but by buying it through DELL you get it at such a massive discount that you could be way off on your assumptions about VMW and still make money.

The magnitude of the discount is remarkable given how liquid these companies are.

[RuleNumberOne]

Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.

VMW is a software monopoly with very wide moat and profit margins.

Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.

Agree - but by buying it through DELL you get it at such a massive discount that you could be way off on your assumptions about VMW and still make money.

The magnitude of the discount is remarkable given how liquid these companies are.

[Gordon Gecko]

Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.

VMW is a software monopoly with very wide moat and profit margins.

Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.

They grew EBITDA ex-stock based comp about 12% on a TTM basis over the past year despite a pretty poor ISG print in the last quarter and depending on how you want to measure it, reported a couple billion in FCFE on an implied market capitalization of -$12Bn. Every dollar they earn and use to delever increases your ownership of VMW relative to the creditors. Plus, at DELL level, you're aligned w/ MSD himself. That matters.

[RuleNumberOne]

Said another way, I wouldn't be surprised if Dell's ex-VMW revenue is halved in 10 years, while VMW's revenue triples over the same time.

Their "Client" revenue is larger than ISG and the moat is even narrower. If they were category leaders in any of those areas, I would feel better. Investing in categories where they are not the leader makes me sleepless.

Dell's EV = 71B, VMW stake =$41B. Over the long run, I don't feel safe paying 30B for the ex-VMW business.

Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.

VMW is a software monopoly with very wide moat and profit margins.

Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.

They grew EBITDA ex-stock based comp about 12% on a TTM basis over the past year despite a pretty poor ISG print in the last quarter and depending on how you want to measure it, reported a couple billion in FCFE on an implied market capitalization of -$12Bn. Every dollar they earn and use to delever increases your ownership of VMW relative to the creditors. Plus, at DELL level, you're aligned w/ MSD himself. That matters.

[Gordon Gecko]

Said another way, I wouldn't be surprised if Dell's ex-VMW revenue is halved in 10 years, while VMW's revenue triples over the same time.

Their "Client" revenue is larger than ISG and the moat is even narrower. If they were category leaders in any of those areas, I would feel better. Investing in categories where they are not the leader makes me sleepless.

Dell's EV = 71B, VMW stake =$41B. Over the long run, I don't feel safe paying 30B for the ex-VMW business.

That would be an implied -7% CAGR on CSG and ISG. Possible. I can't see 10 yrs. out. But it would be weird given positive growth in both segments since EMC close plus consolidating industries. It would be even weirder if that resulted in a similar cash flow decline.

And as an equity investor you are not paying for the $30b ex-vmw business... you are being paid $12bn. $46bn market cap of public subs - $34bn mkt cap DELL.

[RuleNumberOne]

The ISG and Client solutions revenue has too many strong competitors:

In PCs: Apple, Lenovo, HP, etc
In networking: Arista, Cisco, Juniper
In servers: IBM, HP
In storage: PSTG, NTAP, HP, IBM, startups

When such things go into decline, it won't be smooth. I mean the decline may start slow initially and then fall off faster. Because of the leverage, the equity will go down even faster.

But with VMW, there are no such worries, it is a pure software business where they have a monopoly.

I don't have much conviction in the ex-VMW business, it may or may not decline, but why take the chance?

Said another way, I wouldn't be surprised if Dell's ex-VMW revenue is halved in 10 years, while VMW's revenue triples over the same time.

Their "Client" revenue is larger than ISG and the moat is even narrower. If they were category leaders in any of those areas, I would feel better. Investing in categories where they are not the leader makes me sleepless.

Dell's EV = 71B, VMW stake =$41B. Over the long run, I don't feel safe paying 30B for the ex-VMW business.

That would be an implied -7% CAGR on CSG and ISG. Possible. I can't see 10 yrs. out. But it would be weird given positive growth in both segments since EMC close plus consolidating industries. It would be even weirder if that resulted in a similar cash flow decline.

And as an equity investor you are not paying for the $30b ex-vmw business... you are being paid $12bn. $46bn market cap of public subs - $34bn mkt cap DELL.

 

Dell has net debt of $38 billion. Dell is a narrow-moat hardware business (servers, storage, switches) competing with heavyweights like Cisco, IBM, HP.

VMW is a software monopoly with very wide moat and profit margins.

Applying Buffett's test: even if the stock market were to close down for years, I would be happy owning VMW, but unhappy owning Dell. I expect Dell's ex-VMW revenues to decline over time because competition is so strong.

They grew EBITDA ex-stock based comp about 12% on a TTM basis over the past year despite a pretty poor ISG print in the last quarter and depending on how you want to measure it, reported a couple billion in FCFE on an implied market capitalization of -$12Bn. Every dollar they earn and use to delever increases your ownership of VMW relative to the creditors. Plus, at DELL level, you're aligned w/ MSD himself. That matters.

[given2invest]

DELL is *by far* my largest position.

I will just opine in one way:   I have confirmed w/ DELL IR that the debt at HoldCo level is NOT pledged to VMW stake, besides a small margin loan.  Thus, even if you think DELL CORE is worthless, you can buy DELL and get VMW at a 25% discount.  They can spin it out tax free in Sept 2021. 

Of course, DELL CORE not worthless and worth much more than it's debt.  It throws off 3-4b of FCF a year.  I conservatively value it at ~50b or 6x EV/EBITDA.  Actual net debt is 33b or so (can't include financing debt DFS) leaving 17b in equity value or >$20 a share. 

Put all together, DELL today is 40-45% undervalued *just* using today's VMW price, which I think is also undervalued.  And you get to own it side by side with two of the greatest investors of all time, MSD and Silver Lake.

[SHDL]

I have confirmed w/ DELL IR that the debt at HoldCo level is NOT pledged to VMW stake, besides a small margin loan. 

Thanks very much for answering my burning question.

[Castanza]

But with VMW, there are no such worries, it is a pure software business where they have a monopoly.

The only real competition in this space is Kubernetes but that is still a ways off. Wouldn't be surprised to see Google come out with a strong competitor (possibly take back Kubernetes?) as they have been focusing hard on cloud and virtual platforms. I work with VM daily and at least in my specific industry I don't see us getting away from it anytime soon. It's unbelievably user friendly and simple to use. Either way VM isn't going anywhere for at least 5 years.