SunTrust raises price target for VMware by 44%

Published Tue, Aug 30 201610:11 AM EDT

SunTrust increased its target price of VMware by 44 percent on Tuesday, upgrading the stock to buy from neutral on expectations of higher revenue growth due to the firm's full expansion into cloud computing. "VMware's concerted efforts over last few years to transition away from being 'only' a server virtualization company are now complete. Now, VMware is a much broader access, cloud and data center software provider," SunTrust analyst John Rizzuto wrote. "Our estimates head higher. And with a backdrop of accelerating revenue, VMware's valuation looks compelling." In the research note, the analyst increased the firm's 12-month price target to $92 from $64, an increase of 44 percent. The new level implies a gain of 22 percent from Monday's close. VMware, 1 year Source: FactSet By 2017, SunTrust estimates revenue for VMware could jump to $7.47 billion, an increase of 6.5 percent from 2016 estimates. The drivers of that growth will be VMware's cloud virtualization platforms, where the company is the leader ahead of the second largest player, Microsoft . "We believe that VMware has moved its storage (vSAN) and networking (NSX) virtualization products beyond [the] initial set of customers and into the mainstream," wrote Rizzuto, describing both products as the key drivers of revenue growth. The analyst also notes that VMware is aggressively gaining market share in other markets like virtual cloud computing, while its acquisition of AirWatch has allowed it to become the leader in enterprise mobile management, where he predicts 25 percent growth in 2016. This year, shares of ticker VMW are up 33 percent compared with a gain of 9 percent for the S & P technology sector . But even with the recent run-up, Rizzuto thinks the stock remains undervalued given the potential for higher revenue figures. "VMware currently trades at 16x 2017 non-GAAP EPS, and its valuation multiples are near their historic lows. Multiples have compressed over time as its growth rates trended down from double digit levels to mid-single digits. We believe that going forward growth will improve, and so will the multiples," Rizzuto wrote. —CNBC's Michael Bloom contributed to this story

Pat Gelsinger, CEO of VMware

Tony Avelar | Bloomberg | Getty Images

"VMware's concerted efforts over last few years to transition away from being 'only' a server virtualization company are now complete. Now, VMware is a much broader access, cloud and data center software provider," SunTrust analyst John Rizzuto wrote. "Our estimates head higher. And with a backdrop of accelerating revenue, VMware's valuation looks compelling."

In the research note, the analyst increased the firm's 12-month price target to $92 from $64, an increase of 44 percent. The new level implies a gain of 22 percent from Monday's close.