VMware, Inc. (VMW): Should Have No Problem With Piper Jaffray's $111 Target

VMware, Inc. (NYSE:VMW) is putting the petal to the metal today. Shares of the technology company are up more than 2.5% as we type. Piper Jaffray believes today is just a start and VMware is headed even higher.

Piper analyst, Mark R. Murphy upgraded his opinion on the stock to a "Buy" recommendation from "Neutral" with a symmetrical price target of $111 – upside potential of 12.6% to target.

VMware is the provider of virtualization infrastructure solutions utilized by organizations to help transform the way they build, deliver and consume information technology (IT) resources. The Company's solutions enable organizations to aggregate multiple servers, storage infrastructure and networks together into shared pools of capacity that can be allocated dynamically, securely and reliably to applications as needed, increasing hardware utilization and reducing spending.

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Once created, these internal computing infrastructures, or clouds, can be dynamically linked by its customers to external computing resources that run on a VMware virtualization platform.

Murphy lists a handful of reasons why he likes the stock more today than yesterday:

 "1) a mixed Q1 is out of the way and shares have been dragged down by the tech sell-off, but we see a solid set-up for a Q2 bookings rebound and more powerful multi-year product drivers than VMW has enjoyed in quite some time;

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 2) investors may have to favorably revise their opinion of VMW's Management offerings as our latest reseller survey shows adoption rates moving to their highest level ever;

 3) VMware's opportunity to mow down Citrix is more tangible than investors realize based upon product parity and recent talent flow from Citrix to VMware;

 4) our CIO/reseller survey work provide strong validation for VMW as an innovative/respected company with a mid-teens-plus trajectory equating to solid share gains;

 5) valuation at ~14x EV/OCF, in line with NUAN (no organic growth) and TIBX (6% organic growth)."

While we are on the subject of valuation, let's examine VWM's potential based on 2015's sales and earnings estimates. For 2015, analysts project sales of $6.98 billion generating $4.23 per share in profits.

In the last half-decade, VMware traded with an average price-to-earnings (P/E) ratio of 69.71, compared to average earnings growth of 34.05 during the same timeframe. That works out to a P/E to earnings growth premium of 104%.

EPS are expected to climb 20.2% in 2015 versus 2014. If we apply the same P/E premium, then we get a potential P/E of 41.4, just about what Wall Street is paying today, 41.1 times earnings. Applying our hypothetical P/E and 2015's consensus, we get a target price of $170.89.

Meanwhile, WMware will fly past $111 if it trades at its typical price-to-sales (P/S) ratio of 9.85 since 2009. We put the numbers in excel and got a price of $159.70. Piper's $11 requires investors to pay 6.85 times revenue. Ninety percent of the time, the stock traded with a P/S ratio above 7 in the past five-years.

Overall: VMware, Inc. (NYSE:VMW) should have no problem finding $111 provided past valuation metrics remain in effect.