Short interest in VMware (NYSE:VMW) recently reached 10 million shares (11.77% of Float) and "days to cover" went from 2.82 to 4.13 days. As of December 2012, EMC owned 79.6% of VMware's Class A common shares and 100% of Class B common shares. This EMC ownership has increased higher in the five months of 2013.
An analysis of published VMW insider trading purchases by EMC reveals that from May 2012 to May 2013, EMC purchased 4.9 million VMW shares for about $410 million dollars; resulting in a one-year 13% share investment increase.
|EMC cumulative VMW shares owned as of May 23, 2012||38,125,100|
|EMC cumulative VMW shares owned as of May 23, 2013||43,025,300|
|***EMC 12-month Increase in VMW Share Ownership||4,900,200|
|***EMC 12-month Percentage Increase in Ownership||13%|
|Total Investment by EMC into VMW Shares||$409,950,732|
In the five months from January to May 2013, EMC acquired almost half (1.974 million) of the 4.9 million shares. This type of insider share acquisition at depressed prices is completely legal if done in a way that does not take advantage of non-public information. More importantly, large insider purchasing is widely known to be a distinguished indicator of positive upward future stock price movement.
EMC has dutifully reported all insider purchases; but this public information has received no positive analyst or public consideration. Instead, inaccurate analyst comments and news articles have caused a 16-day, 16% downward price shift from $78.60 on May 20, to $66.46 on June 5; resulting in further substantial stop-loss volume liquidations by unsophisticated investors.
Earnings and Price Per Share Guidance
In about six weeks, VMW will report Q2 earnings, and neither VMW or its majority shareholder EMC have made any earnings guidance adjustments since the Q1 earnings report. The MarketWatch Average Target Price with 44 Analysts is $89.77 per share (a 35% PPS increase above $66.46) and the S&P Four-star Target Price is currently $100 per share (a 50% PPS increase above $66.46).
"Our organization saves $1.6 million annually by using virtual clinical desktops to access EpicCare through VMware® Horizon View™," said William Lewkowski, chief information officer, Metro Health Corporation. "Physician satisfaction has improved..."
As a complete contrast to VMW company news releases, over the past 10 days erroneous news releases have significantly impacted the gap between the current PPS and the above target prices.
Erroneous News Releases
The May 30, 5% VMW price decline was caused by the following malignant headline:
This headline resulted when Stifel Nicolaus's Brad Reback (with no VMW or EMC Disclosure) implied and wrote of reduced VMW cash flow projections; while immediately after analysts from UBS and a host of other analysts, who took time to clarify matters with EMC management, reported that Stifel Nicolaus comments were incorrect.
The June 4, 2% VMW Price Decline was also completely unsupported and caused by the following erroneous news article:
This headlined "bidding war" between IBM and EMC never existed; the "bidding war" is completely false. IBM didn't snatch anything from EMC and VMW (EMC's Cloud Computing Partner). EMC immediately sent out a press release UPDATE that "officially denied it was in a bidding war" in the IBM/SoftLayer deal. EMC explicitly states that "EMC was initially approached, uninterested and decided not to bid." (emphasis added)
VMware's two main competitors in the virtualization software industry are Microsoft (NASDAQ:MSFT) in the data center/server market and Citrix Systems (NASDAQ:CTXS) in the desktop market. According to data from market research firm IDC, the virtual machine software market is expanding at a compound annual growth rate CAGR of 9.7%., to $2.43 billion in 2013. Citrix Systems is hampered in comparison to VMW because of limited scalability and security solutions. Microsoft's strategy is to use virtualization products as an extension of its various proprietary MS operating systems, while VMW's strategy is to allow its virtualization products to work with any operating system; providing flexibility, scalability and security. This distinction is important based on VMware's 95% penetration rate among Fortune 1000 companies. VMware will continue to be the leading player in virtualization products with first-mover positioning, support for thousands of applications and more than 90 operating systems, a solid research and development program, and strong sales relationships.
VMW customer base growth will continue as companies are driven to reduce rising operational costs and server proliferation because of higher usage of video and electronic record keeping. VMW's dominant position will continue because its partnership with EMC provides for integrated unified solutions that are more flexible, scalable and secure than what Microsoft or Citrix Systems provide.
Disclosure: I am long VMW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.