VMware, Inc. (NYSE:VMW) is expected to see total revenues up 17% in 2013 on the back of server virtualization trends. These trends should eat up a good portion of company IT budgets going forward, so why is Singer selling out of this virtualization leader? At first glance, VMware trades well above its peers at 55x earnings, but its forward P/E of 30x suggests investors may still be under-appreciating the stock.
Despite an uncertain economic outlook, the expected spending on cloud computing remains strong. The strength in VMware’s virtualization software continued last quarter, with enterprise license agreements up 24% year over year. One negative for VMware is that earnings growth is slowing. The sell-side expects it to grow EPS by 22-23% a year over the next half-decade; this is far below the 45% growth rate VMware has averaged since 2007. Billionaire Jim Simons is still VMware’s top fund owner, but also reduced his stake by 40% last quarter (see Jim Simons’ top picks).
Nike, Inc. (NYSE:NKE) recently divested its Cole Haan and Umbro brands in an effort to better focus its operations. Nike has a global presence, but weakness in China brings to light growth concerns. The shoe company’s initiatives to align products with the Chinese economy will also lead to elevated marketing expenses, which will pressure margins over the interim. A build-up of inventories in this region is also a cause for concern.
This leads us to question the shoe company’s valuation. Sales from China saw 20% growth two quarters ago, but then a 6% growth decline last quarter. Nike’s current P/E of 20x is above its major peers Steven Madden (16.6x) and Adidas (17x). Interestingly, billionaire Ken Griffin – founder of Citadel Investment Group – is still one of Nike’s top owners after a 600% stake increase last quarter (see Ken Griffin’s latest picks).
