VMware Reportedly Targeted for Acquisition by Broadcom

We are maintaining our $175 fair value estimate for narrow-moat VMware VMW after Bloomberg reported that Broadcom is in discussions to purchase the company in a cash and stock deal. No purchase amount was disclosed, but VMware shares have jumped around 20% to $115 on the news. Still, it is likely that Broadcom would pay an acquisition price below our fair value estimate, so at this early stage, we would prefer to see VMware remain a stand-alone business.

We think the addition of VMware is aligned with Broadcom's push into software and expanding recurring revenue streams. However, we believe VMware's long-term value is being pressured by macro factors spurring a technology sector selloff and the company incurring transitory revenue growth headwinds as it pivots to subscription and software as a service from a license model.

We are tentative that the deal will be completed, especially around VMware's $50 billion market capitalization, and continue to see the shares as undervalued. We believe VMware's unique value is being the easy path to embracing any cloud environment, being able to support legacy compute and storage locations while developing new cloud-based applications, and helping organizations achieve the greatest utilization and security for their networking. Being a ubiquitous layer across on-premises, public clouds, and private clouds for networking, developers, and security teams makes VMware's technology essential for the long term, and we expect the subscription and SaaS journey to accelerate growth in the coming fiscal years.