VMWare: Uncertainty or Diversification?

When we sit back and look at recent moves by VMWare, are they best explained as uncertainty or diversification?

Jun 5, 2014 at 11:00AM

VMWare (NYSE:VMW) has a long history of double-digit growth and operational efficiency in the virtualization platform and software industries. Yet, following a rough quarter, continued competition against Citrix (NASDAQ:CTXS), and a slew of new ventures that includes competing against Splunk (NASDAQ:SPLK), is VMWare full of uncertainty, or is it creating diversity?

What does VMWare do?
VMWare's core business is in server virtualization, which allows virtual computers to run different operating systems and applications on one physical computer. That improves business efficiency and the utilization of data, and it saves on costs. Quickly, it has become a fast-growing business, one that's derived from licensing and service revenue.

WMWare's licensing revenue continues to perform nicely, growing 15% in the first quarter. But when it's combined with bookings, the company's Americas revenue grew just 10%. These numbers were hardly bullish for long-term investors. But one bright spot was end-user computing in desktops, which grew 35% year over year.

A more broad battle emerges
With that said, VMWare's core vSphere product has faced increased competition amid competitive pricing and more options. Therefore, with uncertainty, VMware has recently thrown itself in many different directions to enter different industries.

First off, VMWare is directly targeting the PC virtualization leader Citrix, which was the single brightest area of VMWare's quarter, with 35% growth. VMWare has launched new platforms like Horizon 6, which adds new monitoring and automation tools to its existing managed server platforms.

Yet, Citrix seems to be holding its own; the company recently beat first-quarter earnings estimates by a significant margin, and upped its EPS guidance. As VMWare takes aim of Citrix's PC virtualization business, VMWare's core server virtualization platform vSphere has faced competition from Citrix in recent quarters. Therefore, Citrix is growing slightly slower than VMWare, but these two companies appear to be going back-and-fourth while trying to take bites out of each other's market share.

In addition to WMWare straying from its core server virtualization space, the company also made a $1.54 billion bet on acquiring mobile device management company AirWatch, which really fits into the same scheme as server and PC management. However, this is a highly competitive market, one in which countless big tech companies have a presence, Citrix included. But, as Gigaom's Cormac Foster explains, much of this market remains unused or essentially wasted due to problems with integration, security, and making the technology works with different operating systems.

A move of little logic
With all things considered, it's easy to see why VMWare would seek market share in server, PC, and mobile management. The three industries interconnect in many ways. Yet, the company's attempt to tackle Splunk in machine data analytics software is a real head-scratcher, one that doesn't fit with VMWare's other initiatives.

Specifically, Splunk operates in the fast-growing big-data space, gathering and analyzing data found on websites, servers, networks, mobile devices, etc. VMWare has launched a version of vCenter to compete against the market-leading Splunk.

The problem is that Splunk is more than just one application -- it is a collection of more than 500. These applications include security, IT operations, and software, thus giving Splunk a big head start. Also, Splunk is a company that's growing revenue 50% annually, but also one that has operating margins of negative 33% in the last year. VMWare might like Splunk's growth, but is it willing to sacrifice margins to achieve similar growth?

Final thoughts
If you sit back and look at VMWare's recent moves, you might think it is diversifying its business, but it creates doubt with its core server business and gives the illusion of uncertainty. At 25 times forward earnings, uncertainty is a word that's tough to hear, but seems appropriate. As a result, Citrix at 16.5 times forward earnings might be more attractive, with 9% annual revenue growth expected in the next two years.

After all, Citrix already has a growing presence in the industries that VMWare is trying to enter, with the exception of a Splunk-like business. That means less uncertainty at a better price.

Are you ready for this $14.4 trillion revolution?
Have you ever dreamed of traveling back in time and telling your younger self to invest in Apple? Or to load up on Amazon.com at its IPO, and then just keep holding? We haven't mastered time travel, but there is a way to get out ahead of the next big thing. The secret is to find a small-cap "pure-play" and then watch as the industry -- and your company -- enjoy those same explosive returns. Our team of equity analysts has identified one stock that's ready for stunning profits with the growth of a $14.4 TRILLION industry. You can't travel back in time, but you can set up your future. Click here for the whole story in our eye-opening report.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information