Vmware Is Up By 20%, Here Is Why

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Key Insights

  • Vmware stock rallies as Broadcom is reportedly working on a deal to purchase the company. 

  • The deal is reportedly valued at $50 billion. 

  • Vmware stock has already jumped by 20% at the start of the trading session, which limits the potential upside. 

Broadcom Could Be Ready To Buy Vmware

Shares of software virtualization company Vmware gained strong upside momentum after reports indicated that Broadcom was willing to buy the company. According to the reports, negotiations were still ongoing and the deal was not imminent.

Vmware stock peaked back in 2019 near the $207 level and was trading below the $100 level before the reports were released. It should be noted that the stock managed to recover to the $170 level after the coronavirus-related sell-off in 2020 but lost momentum and has been under pressure for months.

As a result, the stock declined to attractive valuation levels. Analysts expect that Vmware will report earnings of $7.02 per share in the current fiscal year and earnings of $7.78 per share in the next fiscal year, so the stock was trading at just 12 forward P/E before Broadcom’s desire to buy Vmware was made public.

What’s Next For Vmware Stock?

According to Financial Times, the deal could be valued at $50 billion. Vmware stock has already moved closer to this level, although the stock will continue to trade at a discount to the potential value of the deal.

Analyst estimates for Vmware have been recently moving lower, but the stock was already trading at attractive valuation levels, which has likely served as one of the key catalysts behind Broadcom’s interest in the deal.

Vmware stock is already up by 20% at the start of the trading session, so its potential upside would be limited as the reported valuation implied a 25% premium to Vmware’s previous closing price.

At the same time, it remains to be seen whether Vmware shareholders would be ready for a deal with a modest premium after the stock has been declining for months, so this story could get a few more twists along the way.

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This article was originally posted on FX Empire