VMware's Hybrid Cloud Should Push the Stock Higher

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

VMware (NYSE: VMW), the provider of virtualization-based cloud infrastructure solutions, recently announced that the company will expand hybrid cloud business with new services. VMware CEO Pat Gelsinger outlined the company’s strategy:

VMware’s vision is to empower people and organizations by radically simplifying IT through virtualization software. Our customers are looking to us to help them solve some of the toughest challenges in IT in simple and elegant ways thereby delivering new levels of efficiency, control and agility. To do this, we will continue to introduce new innovations and offerings that will empower IT as a broker of services that drive speed of business and competitive advantage.

The company reported stronger than expected revenue and earnings when it released fourth quarter numbers in February. Total revenue of $1.29 billion just beat consensus of $1.28 billion, and earnings of $0.81 were solidly ahead of the street estimate of $0.78.

In this article, I will share why I feel VMware's hybrid cloud announcement is a big deal not only for customers, but also for investors.

VMware hybrid cloud

The biggest selling point for VMware's newly announced hybrid cloud strategy -- and the reason it could be a game changer in the infrastructure as a service (IaaS) market -- is because of the common platform VMware customers will now have between their private cloud internal systems and VMware-operated public cloud.

VMware offers its public cloud services via Bluelock. Bluelock is part of VMware's vCloud Data Center Service, meaning it leverages VMware tools to power its offering. It is one of the first to roll out new VMware features, and its product roadmap is aligned with that of VMware's according to Gartner. It has a "Portfolio" service, which provides monitoring of IaaS resources, and advises customers on how to optimize workloads.

I feel VMware is emerging as a strong player in the cloud-based environment due to the following two reasons:

1. VMware’s Hybrid Cloud to strengthen its position among peers

The idea of having a common platform between public and private clouds is not new. Microsoft (NASDAQ: MSFT), for example, offers Windows Systems Center to manage behind-the-firewall IT, and Windows Azure as its public cloud -- it's all within the Microsoft family.

If Microsoft Azure truly embraces hybrid cloud, it could make the leap to an entirely new operating model. It would give Microsoft a powerful position in the cloud, for everything from development and testing to customer support. Hybrid cloud is also a lower risk proposition for Microsoft, as well as the opportunity to end VMware's dominance of server virtualization.

OpenStack also has a common platform between public and private clouds. Rackspace (NYSE: RAX), for example, has a private cloud offering that lets customers deploy the same OpenStack platform that the company uses for its public cloud on their own premises. Rackspace is attempting to build a cloud that can scale to just about anyone's needs, says financial analyst Pat Walravens, and he believes with the OpenStack backing, the size of deals that Rackspace is able to land will only continue to increase.

The Rackspace Open Cloud is built upon a simple pricing model with no hidden costs or extra charges. This simple and straightforward pricing approach is a key part of how the company helps customers take advantage of the real value of the Rackspace Open Cloud, particularly for the next generation of bandwidth and content-centric web applications, which must deliver quality user experiences on a mobile and global basis.

Even Amazon.com's (NASDAQ: AMZN) AWS -- the giant in the IaaS market -- has partners, like Eucalyptus, which is the private-cloud equivalent of AWS. AWS seems to be popular in the start-up community, providing the IT infrastructure for young companies and allowing them to avoid investing in expensive technology themselves.

AWS has one of the widest breadths of cloud services -- including compute, storage, networking, databases, load balancers, applications, and application development platforms, all delivered as a cloud service. Its large pool of capacity in the cloud optimizes it for batch computing, high-performance computing, and big data analytics. It has a large technology ecosystem, which makes running licensed and packaged software easy to do in its cloud.

VMware is traditionally a software company, not an infrastructure management company, so unlike other big-name companies that have rolled out a major IaaS offering, VMware doesn't have a ready set of massive data centers all around the country ready to host this offering.

Using VSPP (VMware Service Provider Program) partner's data centers and white-labeling existing infrastructure would give VMware the ability to source and deploy new cloud locations extremely quickly, with minimal investment. VMware had to make this move. Operating like a traditional software vendor in the cloud era is not a recipe for long-term success.

2. VMware’s strategic partnership with EMC to fuel growth

Last December, EMC (NYSE: EMC) and VMware launched their Pivotal Initiative to benefit from the growing Big Data theme and demand for cloud-based solutions. Basically, both EMC and VMware are going to combine resources to form a strong player in the cloud-based environment.

VMware will contribute its vFabric, GemFire, Cetas, and Cloud Foundry operations, while EMC will contribute GreenPlum and Pivotal Labs. VMware will hold a 31% equity stake in the new operations, it will hold preferred shares, and the company will be represented in the board of the newly formed entity.

The Pivotal Initiative will enable a new generation of workloads that can exploit the advancements VMware is driving in datacenter. By realigning resources within the Pivotal Initiative, VMware will be able to fully mobilize resources on delivering the software defined datacenter, the de facto infrastructure at the heart of cloud computing, and on end-user computing -- two areas where they see tremendous opportunity for growth.

VMware will move over some 500 staff, and it will become the sales agent for Pivotal, therefore receiving a fee for sales support efforts. EMC will contribute another 800 staff to offer more efficient, controllable, and agile cloud-based solutions. In essence, the integrated Big Data ecosystem would combine VMware's vertical specialization with EMC's hardware.

The new operations will have tremendous growth opportunities according to VMware, addressing a $50 billion market opportunity in 2016. The market is expected to grow at an average compounded growth rate of 20% until 2016.

Conclusion

VMware is still in the very early days of its IaaS roll out. Even though it's been rumored for months, the company just confirmed its plans last week. VMware has not yet disclosed how the service will be priced. Given VMware’s commitment in providing a total cloud solution, I expect the pricing will be attractive for grabbing a significant market share. The stock is expected to rise significantly from its current price. 


Anindya Batabyal has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Rackspace Hosting, and VMware. The Motley Fool owns shares of Amazon.com, EMC, Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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