Can VMware Crush Microsoft and Oracle in the Cloud?

VMware (VMW) will release its quarterly report on Monday, and investors remain unconvinced that the company can fend off rising competitive pressures from Microsoft (MSFT -2.45%) and Oracle (ORCL -0.39%). Even though analysts expect VMware earnings to grow at a strong pace this quarter, the stock remains well below its highs from early in 2013, even after a rebound in July.

VMware's specialty is virtualization software, which allows businesses to make their information technology systems more efficient and to take full advantage of the opportunities that cloud computing offers. For a long time, VMware was the undisputed leader in the niche, but Oracle and Microsoft have responded to this threat to their broader cloud businesses and the appeal of virtualization by taking steps forward in their own right. Let's take an early look at what's been happening with VMware over the past quarter and what we're likely to see in its report.

Stats on VMware

Source: Yahoo! Finance.

Can VMware earnings keep growing faster?
Analysts have raised their views on VMware earnings in recent months, adding $0.01 per share to their third-quarter estimates and boosting 2013 and 2014 full-year projections by 1%-2%. The stock has climbed 12% since mid-July, even though it remains about 20% below its highs from earlier in 2013.

All of the gains that VMware stock saw during the quarter came from its second-quarter earnings report. The company beat expectations for both revenue and adjusted earnings, but investors were most impressed with VMware's positive guidance for future licensing revenues and overall sales. The concern coming into the report was that earnings weren't growing fast enough at VMware, so the report helped to quell nervousness and sent the stock soaring.

Still, VMware faces the constant threat of competition. Oracle bought virtualization company Xsigo Systems last year in order to boost its presence in the market, with Ethernet fabric technology potentially helping Oracle expand its already considerable virtualization know-how. Combined with its long expertise in enterprise software, Oracle has a huge client base to draw from as it entices more businesses to adopt cloud-related solutions for a variety of purposes.

For its part, Microsoft has sought to use its dominance in other software areas to make it easier for its customers to adopt virtualization solutions of its own. By offering add-ons to existing platforms like Windows or the System Center, Microsoft hopes to encourage enterprise clients that would otherwise be reluctant to adopt entirely new technology.

But VMware isn't taking the threat sitting down. The company partnered with Brocade Communications earlier this year to combine their expertise in developing virtual and physical hardware architectures that can adapt to the growing importance of virtual data centers. VMware has also benefited from its relationship with majority owner EMC, which gives VMware opportunities it might otherwise not have, such as EMC's Pivotal spinoff earlier this year.

In the VMware earnings report, watch to make sure the company follows through on its growth prospects. Excitement about future earnings gains could drive shares higher, but VMware still needs to prove it can get past Microsoft and Oracle in order to succeed in the long run.

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