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Merrill Lynch Wants to Bust the VMware Myth

Jon C. Ogg

VMware Inc. (VMW) is being covered in a very positive research note from Bank of America Merrill Lynch. The firm is starting a "Myth Buster" series, and virtualization leader VMware is taking the first report here. Merrill Lynch reiterates its Buy rating and its $106 price target.

This new "Myth Buster" is looking to cut through common misperceptions on Wall Street about contentious stocks. The firm feels that two investor misperceptions may be why the stock has just not worked. The team said that earnings were strong, but the two items are:

  • Facing tough 2014 enterprise license agreement comparisons.
  • The core vSphere growth could be a drag.

The long and short of the matter is that 2014 license growth estimates of 9% to 10% have upside. The 2011 renewals could be greater than the 2013 uptick from 2010 renewals, and the firm feels that non-vSphere products could become 50% of new license business in the third quarter of 2014. Growth segments are vCloud, EUC and storage and network.

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We would point out that VMware closed at $80.75 most recently, a signal of 31% implied upside if the firm is right. The consensus price target from Thomson Reuters is $98.62, and even the median price target is $100 on the stock. VMWare has traded in a 52-week range of $64.86 to $99.55.

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