Our Original VMWare Thesis

Published on 09/10/21 | Saurav Sen | 3,003 Words

The BuyGist:

  • We've reposted our original VMWare thesis because it's relevant to our analysis on "Virtual Computing".
  • Since then, we've refined our investment process - we're now practitioners of Expectations Investing, which we feel is much better suited to our fast-changing world. 
  • In "Investing in Virtual Computing", we analyze whether our VMWare thesis still holds up.

Thesis Summary

Leader in Virtualization technology - with tailwinds like Cloud Computing, Containerization and 5G all set to push its already growing business. Competition is strong but limited in number. Main risk is expensive acquisitions.

Competitive Advantage:

  • Core Competency? Market leader in Hardware and Software Virtualization.
  • Products: Better or Cheaper? Trying to be Better by offering end-to-end virtualization.
  • Historical Growth? Solid Revenue, EBITDA Margin and Free Cash Flow growth.

Durability of Competitive Advantage: 

  • Competition/Threats? Big Cloud providers, Red Hat, Nutanix. Container startups.
  • Protection/Moat? Strong. High Switching Costs. Tie-ups with Big Cloud Providers.
  • Cash Flow Volatility? Should be muted because of the stickiness of the business.

Management Quality:

  • Strategy/Action? Average. Price paid for recent acquisitions is questionable.
  • Return on Equity? High. High margin business, low debt.
  • Sustainable Free Cash Flow? About $2.8 billion. Translated to roughly 135/share.
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