Does VMware’s Stock Drop Present a Buying Opportunity?

With shares of VMware (NYSE:VMW) trading at around $78.71, is VMW an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

VMware recently released news that hasn’t been well-received by investors. Perhaps the biggest news is that the company will cut 900 jobs, which is 7 percent of its workforce. In some cases, cutting jobs can be looked at as a positive, but that’s not the case here. This news came out at around the same time it was revealed that the Q1 revenue outlook was below expectations at $1.17 billion to $1.19 billion. The expectation was for $1.25 billion. The reason given was decreased demand. It looks as though Microsoft Corporation (NASDAQ:MSFT) might be playing a role, sneaking its way into the business and stealing market share. There is a chance that this has led to VMware cutting its prices. On a smaller scale, Oracle Corporation (NASDAQ:ORCL) might also be stealing market share.  

As far as Q4 earnings go, EPS came in at $0.47 compared to $0.46 from the same quarter last year. Q4 revenue was a record $1.29 billion, which was also a 22 percent increase year-over-year. FY2012 revenue was $4.61 billion — also a record. In addition to that, margins improved. On the negative side, Q4 operating cash flow decreased 12 percent, and Q4 free cash flow decreased 19 percent.

Let’s take a look at some important numbers for VMware before forming an opinion…