VMware CEO Departure Provides Buying Opportunity

On Jan. 13, Pat Gelsinger stepped down as narrow-moat VMW VMware’s CEO and will take the helm at Intel. Bob Swan will leave Intel’s leadership role on Feb. 15. Gelsinger will remain a VMware board member. VMware CFO Zane Rowe will act as interim CEO as VMware’s board searches for a permanent replacement. VMware shares fell 7% midday on the news.

We understand the market reacting negatively to the departure of a CEO who we believe has done a commendable job at VMware; however, this can create a buying opportunity for investors. Gelsinger, who had been CEO at VMware since 2012, has profoundly pivoted the company over the last few years, turning VMware into a key component of cloud infrastructure while expanding into high-growth vectors and away from core virtualization solutions. We believe Gelsinger has strongly led VMware’s direction by turning potential headwinds into growth opportunities. Although taking over at VMware comes with the additional challenge of Dell’s ownership, we believe a new CEO will be well positioned to keep the strong momentum rolling with VMware’s subscription and as-a-service offerings. We are maintaining our $202 fair value estimate and view the shares as undervalued.

Although details are sparse, we expect that VMware could tap one of its chief operating officers. Sanjay Poonen, COO, customer operations, has been at the company since 2013 and is responsible for VMware’s worldwide sales, services, support, marketing, and alliances, as well as the security business. Raghu Raghuram, COO, products and cloud services, has been at VMware since 2003 and has ownership of all product and service offerings and centralized services, support, and operational functions. We believe that either one would be well equipped to keep the strategic imperatives with profound familiarity of the inner workings of the company, but we expect VMware’s board to perform an extensive global search for the proper leader.

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