Betting On the Cloud!

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

Choosing technology stocks for analysis is sometimes very difficult to do. One can’t just pick up the stocks simply because their products are selling well and because their share price is going up. It is always very necessary to check if the company has been able to bring in new technologies to fulfill the growing needs of the market, and also if there has been a timely upgrade within their portfolio.

Today I have picked up VMware (NYSE: VMW), which holds a leadership position in the virtualization market. Virtualization is a game changing IT technology with its cost savings, less energy consumption, and improved disaster recovery benefits. The company deals in cost effective Cloud and Virtualization software allowing a lot of flexibility for the Enterprises to meet their unique business challenges.

VMware posted strong 3Q 2012 earnings with revenue of $1.13 billion, up 20% Y/Y. The stock is currently trading at $90.95, up ~10% year to date.

VMware competes with Microsoft (NASDAQ: MSFT) in hypervisor-based Server Virtualization products. Microsoft’s Hyper-V Server 2012 enables users to consolidate workloads, improve server utilization by enterprises, and manage cost savings. Microsoft’s Hyper-V is loaded with several extra benefits over VMware’s x86 servers, like more flexibility, large memory support, and the ability to combine multiple network adapters for load-balancing, which could make it attractive to the SME’s. But given the existing strong presence of x86 servers, it is not easy for Microsoft to easily take over from VMware.

On the other hand another competitor, Citrix (NASDAQ: CTXS) acquired the open-source software firm in 2011 to compete with VMware’s cloud operating systems. The acquisition gives Citrix “CloudStack,” best known for its private and public cloud computing systems. The company is now preparing to launch a new service named “Cloud.” But the market is still in doubt whether it is a completely new product from or a re-launch of the services already being provided by the company.

Bringing the discussion back to VMware, we see that the company is well prepared to win the market, as well as investor’s attention, with hefty acquisitions and new products.

Nicira Acquisition

In July 2012, VMware announced the acquisition of Nicira for $1.26 billion. VMware is ready to monetize Nicira’s specialization in software-defined networking, as it is already a trailblazer in the server virtualization market. Therefore VMware’s purpose is quite clear; it wants to make good use of the opportunity in Datacenters and Cloud networking. The key customer base of Nicira Inc., such as AT&T, eBay and Fidelity, and its speedy services, will no doubt enhance the company’s market segment and produce new revenue streams.

DynamicOps Acquisition

VMware is buying DynamicOps with the purpose to amplify its Cloud management offerings with DynamicOps' multiple hypervisors capability. It complements VMware’s existing cloud management packages and provides add on capabilities to VMware vCloud Director Suite by enabling customers to consume multi-cloud resources, which will help VMware strengthen its position as a vendor of choice.

Launch of vCloud suite

The vCloud suite opens up a new growth opportunity for VMware. VMware launched the management package for data centers known as VMware vCloud Suite in August 2012. Later on, in Oct 2012, company released extensions to VMware vCloud Suite with the introduction of VMware vCloud Automation Center™ 5.1 and upgrading VMware IT Business Management Suite to simplify services across multiple and heterogeneous clouds.

vCloud suite has altogether changed the cost management theory through its increased efficiency achieved through Cloud management consolidation for desktops and servers across virtual and physical systems and multiple Clouds. The fully integrated product also provides easier selling benefits over multiple products.

In conclusion, VMware is focused on this fast growing segment of the Cloud market through acquisitions and launches of new products. The acquisitions of Nicira and DynamicOps will expand its footprint in new areas. Also, the new product launches are upgrades over products, which again is a good customer-catching activity. Additionally, VMware has authorized a share repurchase of up to $250 million by the end of 2014 in addition to its ongoing $600 million stock buyback program, announced in February 2012. Despite a forward P/E of 28.07x ,which is quite higher than that of its competitors Citrix (19.54) and (Microsoft) 8.24, I would recommend investors have a look at the stock, which has a perfect blend of key factors creating upside movements for the stock.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft and VMware. Motley Fool newsletter services recommend 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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