VMware VMW is wading through tough times, primarily due to its recent withdrawal of first-quarter and fiscal 2021 guidance, which was previously provided on Feb 27.
Uncertainty about the impact of the coronavirus outbreak on its business operations was responsible for this Zacks Rank #5 (Strong Sell) company’s decision.
Challenges in the Wider Market
After President Donald Trump announced the extension of social-distancing guidelines through April-end, it is likely that market volatility will persist and the economy will further worsen. This does not bode well for most companies including VMWare.
Although the U.S. government is sanctioning relief packages, the underlying menace of the pandemic continues to spread its tentacles deeper with no signs of waning any time soon. The associated global economic and financial impact doesn’t seem to have peaked yet. Therefore, we expect further turbulence in the coming days.
Other Causes for Concern
Apart from instability induced by the coronavirus outbreak, VMware’s underperformance can be attributed to an unfavorable revenue mix. Moreover, margins are anticipated to be under pressure due to the ongoing investments in hybrid cloud and SaaS portfolio expansions.
Additionally, the Carbon Black and Pivotal acquisitions are expected to dent the operating margin in fiscal 2021.
Declining Estimates a Worry
Notably, the Zacks Consensus Estimate for first-quarter fiscal 2021 has been revised 0.8% downward to $1.21 per share in the past week. The consensus mark for the full fiscal has also moved 1.3% south to $6.15 per share.
The aforementioned estimates make us apprehensive about the stock’s near-term prospects.
Best Bets This Lackluster Season
The tech sector’s resilience against recessions owing to continuous digital transformations, rapid adoption of cloud computing and the ongoing integration of AI with machine learning (ML) makes it attractive to investors. Additionally, the tech giants are cash rich, which provides them with the much-needed buoyancy despite a surrounding adverse business environment.
Even during times of unpredictability, investors should someway park their resources in the market. Though VMWare’s prospects may not appear appealing at the moment, there are some tech stocks that offer good investment opportunities in 2020.
With the help of the Zacks Stock Screener, we pick four such stocks that either carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Moreover, these stocks have given positive returns in the year-to-date period, unlike VMWare.
Year-To-Date Price Performance
Akamai Technologies AKAM carries a Zacks Rank #2. This Cambridge, MA-based company is a global provider of content delivery network (CDN) and cloud infrastructure services.
Akamai is gaining momentum from robust growth in its cloud security solutions. Moreover, growth in Media & Carrier Division is a positive. Solid demand for Kona Site Defender, Prolexic Solutions, new Bot Manager Premier and Nominum Services are also expected to drive the top line in the upcoming days. The traction gained from Enterprise Application Access and Enterprise Threat Protector is noteworthy. Further, increasing adoption of mobile applications on the growing mobile data traffic bodes well. Strong traffic growth in video downloads is a tailwind too.
Akamai has a trailing four-quarter positive earnings surprise of 7.9%, on average. The Zacks Consensus Estimate for 2020 earnings has increased 2.5% to $4.89 per share over the past 60 days.
Another Zacks #2 Ranked company Cogent Communications CCOI is a Washington, DC-based Tier 1 Internet Service Provider (ISP) that offers low-cost high-speed Internet access, private network services and colocation center services with ultra-low latency data transmission.
Its On-Network segment is the main source of long-term growth as it generates significant revenues and serves a varied range of corporate and net-centric customers in various regions. Cogent primarily benefits from its cost-effective operations, backed by efficient network expansion and pricing flexibility. Its advanced colocation data center services provide continuous power supply, making it ideal for disaster recovery and data backup. Low-churn corporate customers aid in generating a positive cash flow with accretive customer connections.
Cogent has a trailing four-quarter positive earnings surprise of 15.93%, on average. The Zacks Consensus Estimate for 2020 earnings has risen 7.3% to $1.03 per share over the past 60 days.
Westford, MA-based Ribbon Communications Inc. RBBN, another #2 Ranked stock, develops communication software. It provides session border controllers, diameter signals, policy and routing servers, media and signaling gateways, cloud and mobility solutions.
Backed by an in-depth knowhow of innovative networking solutions, Ribbon boasts a diverse portfolio of Session Border Controllers (SBCs), certified by Microsoft Teams for direct routing call services. Additionally, Ribbon firms up focus on delivering real-time and secure data and voice network capabilities for the cloud, network and enterprise edge with consistent investment in high-growth markets.
Notably, the Zacks Consensus Estimate for 2020 earnings has grown 17.3% to 61 cents per share over the past 60 days.
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