VMware Inc.’s (VMW) stock has climbed by more than 22 percent in 2018, and hedge funds were adding the stock to their portfolios at a furious pace in the second quarter. During the quarter, the stock rose to number 31 of the top 100 stocks on the WhaleWisdom Heat Map. Additionally, it was added to the WhaleWisdom WhaleIndex 100 on August 15.
The company finds itself in an enviable position in the battle for dominance in cloud computing through its partnership with Amazon Web Services. Meanwhile, analysts are forecasting strong earnings and revenue growth through the year 2020. However, shares may already be fully valued.
Hedge Funds Buying At A Furious Pace
Of the 150 hedge funds WhaleWisdom tracks for its heat map, 16 hedge funds held the stock, with four hedge funds making the stock a top-ten holding. However, it doesn’t stop there, even the hedge funds outside of the top 150 funds tracked for the heat map were buying the stock. The total 13F shares held by hedge funds increased by more than 31 percent in the second quarter to 22.3 million. In total 45 hedge funds created a new position or added to existing ones. That is versus the 38 that were reducing or exiting their stakes.
Analysts are bullish on VMware too, currently forecasting earnings to grow by 18.5 percent to $6.15 per share, on revenue growth of more than 11 percent to $8.8 billion in fiscal 2019. Earnings are expected to continue to grow in 2020 and 2021 as well but at a slower pace of 8 and 9 percent. Revenue growth is expected to continue to rise as well, at 8 and 7 percent.
However, the robust growth comes at a price, with investors paying nearly three times the 2020 earnings growth rate. The stock trades at roughly 23 times 2020 earnings estimates of $6.62 per share, while also trading at the upper end of its historical valuation range of 15 to 27, since 2016.
Analysts do not see shares rising much from their current stock price. The average price target on the stock is just $164, about 7 percent higher than the current stock price of $153.25.
Hedge fund investors may be betting revenue and growth accelerates at an even faster pace than the current forecasts. If that growth doesn’t emerge, it could result in the fast-moving hedge funds quickly running from the stock, sending it sharply lower.