A Few Reasons VMware Inc's Virtualization Dominance Can Continue

VMware leads the pack in virtualized servers, and it can get even better.

Jul 8, 2014 at 8:45PM

VMware (NYSE:VMW) has established itself as the leader in virtualization, commanding 64% of the virtualized server market in 2013, according to IT Candor. It has been delivering solid performance, beating earnings estimates in each of the last four quarters. This is remarkable, as VMware faces stiff competition from a bigger technology player such as Microsoft (NASDAQ:MSFT), while smaller rivals such as Red Hat (NYSE:RHT) are trying to gain a footing in this market.

A look at VMware's business will reveal why its dominance will continue.

The virtualization opportunity
The IT industry is undergoing a significant shift from client-server computing to the mobile cloud, offering customers secure, seamless, and immediate access to applications and data they require. Therefore, major IT companies are increasingly replacing their hardware-defined data centers with software-defined data centers, where all core components are virtualized and infrastructure is highly automated.

VMware is assisting customers in unlocking the value hidden in software-defined data centers. It is focusing on three strategic priorities -- the software-defined data centers, hybrid cloud, and its end-user computing business.

The software-defined data center, with computer and network virtualization as its foundation, is expected to help enterprises address modern security needs in an innovative way. As a result, VMware is seeing strong customer momentum, driven by new customer trials. 

Focus on products
To address the needs of customers, VMware recently launched Virtual SAN, which is a new storage solution designed for virtual environments. The company is rapidly executing on its hybrid cloud vision. Its vCloud Hybrid Service enables organizations to extend their data centers to the cloud. 

The company is trying to deliver a complete suite of solutions to customers with services such as vCloud Hybrid Service Disaster Recovery. This is a unique hybrid cloud-based service that provides an affordable way for customers to protect their data centers. Customer feedback for this service has been positive.

Despite having the leading position, VMware believes it can still gain share in desktop virtualization. Horizon desktop-as-a-service, or DaaS, a new cloud-based desktop service introduced in the first quarter, is receiving robust customer attention. This service delivers enterprise-class virtual desktops, running on VMware vCloud Hybrid Service. 

VMware has also announced VMware Horizon 6, a highly integrated solution that delivers published applications and desktop virtualization on a single platform. Horizon 6 leverages highly differentiated integration with software-defined data center components like Virtual SAN and cloud management.

End-user computing prospects
VMware's end-user computing group is also gaining traction, driven by the acquisition of AirWatch, which provides enterprise mobile management and security solutions. This acquisition has helped VMware gain strong customer momentum, as AirWatch has approximately 12,000 customers.

License bookings for end-user computing, including AirWatch, were up 35% on a year-over-year basis in the first quarter. The company is trying to sustain the momentum in end-user computing. It has expanded its ecosystem by strategically partnering with Google.

VMware will provide secure cloud access to Windows desktops, apps, and data on Google Chromebooks through its DaaS platform. It has also enhanced its partnership with F5 Networks to deploy secure access control for virtual desktop deployment. In addition, NVIDIA will be providing rich graphics performance via DaaS to VMware's platform. The company has also extended its partnership with Palo Alto Networks to deliver an integrated solution, while providing strong security across customers' physical and virtual environments with a single point of management. 

Competitive threats
VMware's moves should allow it to stay ahead of the game in virtualization, where Microsoft and Red Hat are making good progress. Microsoft's virtualization platform, Hyper-V, is cheaper than VMware's vSphere Enterprise Edition. The software giant has continued to add new features to Hyper-V. Microsoft also has the advantage of leveraging its current Windows client relationships to improve its position in the virtualization market. 

Since Microsoft is the second-biggest player in virtualized servers, VMware will have to keep a close eye on its moves.

Meanwhile, Red Hat is also trying to gain a bigger share of the virtualization market by way of acquisitions. It recently acquired eNovance, a key player in open-source cloud computing. eNovance's client list is impressive, as it has around 150 global customers that include Alcatel-Lucent, Cisco, Cloudwatt, and Ericsson. This acquisition will allow Red Hat to reach more customers with its OpenStack technology. 

The takeaway
VMware's focus on delivering solid products and services should aid its growth in the long run. Moreover, the company's balance sheet is also in good health with a cash position of $6.6 billion and debt of just $1.5 billion. Finally, at a forward P/E ratio of 23, VMware looks like a good buy as its earnings are expected to increase at a compound annual rate of 16% over the next five years.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Google (A shares), Google (C shares), Nvidia, Palo Alto Networks, and VMware. The Motley Fool owns shares of F5 Networks, Google (A shares), Google (C shares), 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.

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