VMware: We Like the Deal With Broadcom and Now See a Higher Probability of Closing

We raise our fair value estimate for VMware VMW to $180 per share from $161 and maintain our narrow moat, High Uncertainty, and standard capital allocation ratings. Our fair value estimate increase is purely due to raising our probability of the pending acquisition by Broadcom AVGO closing and VMware’s valuation under the half stock/half cash deal rising with Broadcom’s stock price. If the deal were to fall apart, we’d likely maintain our stand-alone $175 fair value estimate for VMware.

VMware, a pioneer of virtual machines, dominates the mature data center server virtualization market. With organizations prioritizing hybrid and multicloud approaches, we believe VMware’s robust cloud provider partnerships, including the major hyperscalers, should help the firm handle customer needs. We expect VMware’s growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio.

VMware’s vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. We believe the company’s strong franchises within end user compute, security, and virtualized networking and storage can support newer growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. We think software cohesion across on-premises and clouds along with nascent networking products should give VMware durable medium-term growth.