Markets

Why VMware Plunged 18.9% in August

What happened

Shares of VMware (NYSE: VMW) fell 18.9% in August, according to data from S&P Global Market Intelligence, after the cloud-computing and virtualization company announced strong quarterly results and also unveiled two aggressive acquisitions.

VMware stock dropped nearly 10% on Aug. 23, 2019 alone -- the first trading day after its second-quarter update hit the wires. Revenue climbed 12.2% year over year to $2.44 billion, translating to a more modest 3.9% increase in adjusted earnings to $1.60 per share. Analysts, on average, were looking for lower earnings of $1.55 per share on revenue closer to $2.40 billion.

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So what

VMware CFO Zane Rowe called it a "strong financial performance," citing broad growth across each of its key geographies.

But the market was less pleased about VMware's two separately announced acquisitions, including a $2.7 billion deal for cloud-native platform company Pivotal Software (NYSE: PVTL) and a $2.1 billion agreement to purchase cloud-native endpoint protection leader Carbon Black (NASDAQ: CBLK)

"These acquisitions address two critical technology priorities of all businesses today -- building modern, enterprise-grade applications and protecting enterprise workloads and clients," elaborated VMware CEO Pat Gelsinger. "With these actions we meaningfully accelerate our subscription and [software-as-a-service] offerings and expand our ability to enable our customers' digital transformation."

Now what

VMware also reiterated its full-fiscal-year target for revenue of $10.03 billion, or growth of 11.8% year over year, which should translate to adjusted earnings of $6.54 per share. Still, investors are clearly worried the acquisitions' combined enterprise value of nearly $5 billion is a big pill for VMware to swallow -- even with its own market capitalization sitting north of $60 billion as of this writing.

Until the company can show more tangible progress of its acquisitive strategy yielding fruit, I suspect VMware stock will remain under pressure.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends VMware. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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