Should you invest in VMware (VMW) ahead of spin-off?

The decision by Dell Technologies (NYSE: DELL) to spin off its cloud software subsidiary VMware (NYSE: VMW) was well-received by the market and the announcement spurred a stock rally. Besides enhancing their valuation, the spin-off is expected to give the companies access to new credit and help improve their financial position. It will also create additional value for shareholders and offer fresh investment opportunities.

Road Ahead

Like its parent, VMware stands to benefit from the independent and simplified capital structure, post-separation. Being eligible to join the leading stock indexes would add to the company’s future prospects. After a brief pullback in early 2021, VMware’s shares performed well so far. And, it seems they don’t have much room for growth in the immediate future, after the recent gains. So, adopting a wait-and-watch strategy now would bring better opportunities in the future. In short, it might not be the right time to invest in VMware.

Dell has been exploring the possibility of spinning off VMware for quite some time, which joined its fold a few years ago. This month, the companies agreed on a deal to become separate entities, which is expected to simplify their corporate ownership structure. The transaction is scheduled to close in the final months of 2021. VMware, which has been headed by CFO Zane Rowe after the departure of CEO Pat Gelsinger earlier this year, is yet to find a full-time CEO.

Tailwinds

Demand for the California-based tech firm’s technologies and solutions remained high last year as a growing number of customers used them to support their digitization initiatives during the pandemic. Recently, the VMware management unveiled its 2030 Agenda, evoking significant interest among stakeholders. The 30-point agenda will be integrated into the business with focus on various goals including sustainability.

From VMware’s Q4 2021 earnings conference call:

“We’re committed to investing in our future growth and building our subscription and SaaS business while we deliver technologies and solutions today that help our customers and partners with their digital transformations. So thank you again to our customers, our partners and the VMware team for helping us close a successful fiscal 2021. We look forward to providing continued updates on our progress in FY 2022.”

Strong 2021

In fiscal 2021, VMware’s subscription and SaaS businesses witnessed strong growth and accounted for about 20% of total revenues, which grew 9% annually to $11.8 billion. The impressive topline performance translated into a 15% increase in adjusted earnings to $7.20 per share.

Read management/analysts’ comments on VMware’s Q4 results

Shares of VMware traded lower in the early hours of Tuesday, after gaining 30% since the beginning of the year. Last week, Dell registered one of the biggest one-day gains and breached the $100-mark for the first time. On Tuesday, the stock traded at an all-time high.