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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers