The fourth-quarter earnings season represents peak earnings for many S&P 500 companies. Many companies are facing more difficult year-over-year comparisons and a strong currency headwind. So, while the S&P 500 should continue to climb higher in the upcoming months, it will be at a significantly slower pace.
Not all stocks will thrive in this environment. The stock market will narrow, as institutional investors chase fewer stocks. Essentially, the stock market will act like a funnel and divert funds to stocks that will continue to prosper in a decelerating earnings environment. Today, I’d like to talk about one such stock.
We’re seeing institutional investors chase VMware, Inc. (VMW) ahead of its fourth-quarter earnings results tomorrow, after the market close. In fact, it hit a new 52-week high of $176.66 on Wednesday morning.
Based in Palo Alto, California, VMware is a software company that develops computer programs used to create and manage virtual machines. In other words, VMware’s products help make cloud computing possible. Cloud computing allows businesses to use applications without actually installing them, which helps companies reduce operating costs, especially those related to computing resources.
VMW is a leader in the cloud computing field; it is the infrastructure platform choice of 100% of the Fortune 500. It also has strong marketing relationships with computer hardware vendors, like Dell (DELL), Hewlett-Packard (HPE) and IBM (IBM).
Cloud computing remains a hot trend, as there’s been an explosion in storing pictures, video and data in the cloud, or, in other words, on data servers. Folks’ addiction to smart phones is also boosting storage on the cloud, thanks to higher resolution pictures. This trend is so strong that CenturyLink and Statistica expect the cloud computing market to reach a whopping $411 billion by 2020.
As a result, I expect VMware to post strong results on Thursday.
For VMW, analysts are expecting earnings of $1.88 per share on $2.5 billion in revenue. This represents an 11.90% year-over-year increase in earnings and an 8.20% rise in revenue. VMware has a solid history of beating estimates, posting an earnings surprise in each of the last four quarters. So, while earnings estimates have remained steady over the past three months, I wouldn’t be surprised to see another quarter of better-than-expected earnings tomorrow.
This is a stock to watch ahead of its earnings report, especially since it has an “A” rating in my Portfolio Grader, which it’s held steady at for the past two weeks.