Why This Notable Analyst Downgraded Shares Of VMware

• VMware, Inc. (NYSE: VMW) shares have been on a downward trajectory, and have lost 47 percent since July 28.
• Summit Research’s Srini Nandury downgraded the rating for the company to Hold, while reducing the price target from $80 to $40.
• Business could get worse before it gets better, Nandury stated.

VMware reported better-than-expected results, but its guidance was below the consensus expectations. Analyst Srini Nandury wrote, “While we acknowledge that we are little late in moving to sidelines, we believe the company will see its business get worse before it will begin to stabilize, so there isn’t an immediate reason to stay positive.”

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Although VMware has a robust pipeline of new product, an install base of more than 500,000 customers, is a trusted vendor for most enterprises and has exhibited solid execution, secular challenges could adversely impact revenue growth in the near term, Nandury said.

For most of 2016, Vmware’s business would be in transition mode. The analyst mentioned that it could take until middle of 2017 for the company to return to license growth. He added, “While the billings will likely be better, we do not expect license revenue growth to return to mid-single digits until middle of next year.”

Management churn could also adversely impact growth in the near term. Although Vmware’s shares are currently cheap and the company is likely to generate strong cash flow, which would boost share repurchases and acquisitions, “we are on the sidelines until we can see evidence that license revenue growth is poised to return,” the Summit Research report noted.