EVENT: VMW reports Q3 tonight after the close. The options market is implying about a 6.5% move vs the 4 qtr avg move of ~4.6% and the 8 qtr avg move of ~5.4%.
SENTIMENT: Wall Street analysts are fairly positive on the stock with 26 Buys, 14 Holds and only 1 Sell with a 12 month price target of about $112, or 35% higher from current levels.
PRICE ACTION/TECHNICALS: The stock is dead flat on the year, massively under-performing the Nasdaq, up almost 16% ytd. Since making a new 4.5 year high in April, the stock is down nearly 30% and now sits less than 5% from the 2012 low.
Given the stock’s poor relative performance to the broad market, and its peers, it is important to take a look at the short and long term technical picture. The one year chart shows little other than the fact that the stock is very quickly approaching a key support level at $80.
[caption id="attachment_18403" align="aligncenter" width="490" caption="VMW 1 YR chart from Bloomberg"]
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Looking back at the chart since its IPO a little more than 5 years ago, after its initial boom and then bust and the long road back. Since retaking the $80 level in 2010 for the first time since it broke below in 2008, the stock made a series of higher highs over the next 2 years, right up until this last high made in April. The chart below shows what appears to be me to be a textbook Head and Shoulders Top formation with $8o as the neckline, the white circle as the left shoulder, the red circle as the head, and the green as the right. The $80 level is a must hold as the next real support level looks to be about 10% lower.
[caption id="attachment_18404" align="aligncenter" width="490" caption="VMW 5 YR chart from Bloomberg"]
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VOLATILITY: For a large cap tech stock, VMW has unusually high implied volatility with at-the-money vol usually settling at or slightly above 30% post earnings. If the stock makes a muted move after tonight’s print, I would expect IV to come in from the high 40s to mid to low 30s for Nov and mid 30s for Dec.
[caption id="attachment_18405" align="aligncenter" width="490" caption="VMW 30 day Implied Vol vs 60 and 90 Day Realized Vol: Bloomberg"]
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FUNDAMENTALS/VALUATION: I don’t have much to add on the fundamentals of this company as it is not one that I know well. The main tenets of the bear case is that the stock is priced for perfection trading at 31x this years earnings that are expected to grow 24%, and 26.5x next years that are expected to see a sharp drop off to 16% growth. On a price to sales basis, VMW has a ridiculous multiple at ~6.5, the only tech high-flier with a market cap above $20b with sales above $2b is CRM (price to sales of ~6.75) and that is a whole ‘nother story. The balance sheet is solid with ~15% of the market cap in cash and no meaningful debt.
MY VIEW: The stock is priced for perfection and in this market environment, specifically as it relates to tech earnings, that could be a lethal combo. Long premium trades will be hard to earn out given how high vol is, depending upon your directional bias. Calendars make the most sense, or if you think the implied move is rich, selling Iron Condors could be the play. We are looking a prospective trades and will post on anything that looks compelling.