VMware (NYSE:VMW) reported record earnings of $5.2 billion in 2013, with growth of 13% year-over-year. Projections for 2014 are even more positive, with 16%-18% revenue growth, including 12%-16% license growth. Not surprisingly, the price of the stock over the last year has followed VMware's results and prospects, increasing by over 30%.
A company with great performance will inevitably begin to see increased competition. But, with VMware's established server virtualization platform and its expanding array of products in related markets, the question is, can anyone curb VMware's growth?
A battle on the home front
VMware's platform for server virtualization has always been central to its business since it allows for selling additional products. VMware has a dominant position in this market, but two competitors might start taking significant market share.
The first is Microsoft (NASDAQ:MSFT), which has gradually been improving its virtualization offerings. In particular, Windows Server 2012 includes an updated version of Microsoft's virtualization product, Hyper-V. Microsoft will cease mainstream support for Windows Server 2008 in 2015, which means many companies might consider a move to Windows Server 2012 at the same time that they look to virtualize their IT infrastructure. This might give Microsoft's virtualization products a viable chance.
On the other end, open-source provider Red Hat (NYSE:RHT) has been investing in its Linux virtualization initiative, the Kernel-Based Virtual Machine, or KVM. The important development here is that IBM has recently put its weight behind KVM, with one IBM engineer stating, "We want KVM to be a big enough presence in the market to keep prices low and affect the way other vendors do business." Whether or not this was a direct jab at VMware, it's clearly not good news.
Besides server virtualization, VMware has been moving to virtualize other parts of the data center. In August 2013, It released NSX, a network virtualization product, then went on to release vSAN, its virtual storage technology, in March 2014. VMware estimates the virtual networking and storage markets to be worth $8 billion each.
On the virtual networking side, VMware is likely to compete head-to-head with Cisco's (NASDAQ:CSCO) Application Centric Infrastructure, announced in November 2013. Cisco has a lot to lose by allowing VMware to move network intelligence out of the hardware layer and into software controllers. It's therefore not surprising that Cisco is spending a lot of money to develop and evangelize its vision of how software-defined networking should look, making it a serious obstacle for VMware's expansion in this market.
The virtual storage market is more established, and VMware will be competing against the likes of NetApp and some current partners, like storage provider Nutanix. Since it is not an early entrant in this market, VMware's success will rely on the quality of its product and on bundling (from the customer's perspective, it will often make sense to go with a single vendor, which benefits VMware since it's the go-to name in server virtualization).
The fight for the cloud
One of the hottest trends in the tech sector has been the move to cloud computing, a market that VMware estimates at $16 billion. Since VMware made its vCloud Hybrid Service generally available last summer, it's begun to compete with big names such as Amazon, Google, and Microsoft in the infrastructure-as-a-service market. Undoubtedly, each of these players will keep innovating, cutting prices, and fighting for market share.
Once again, open-source is threatening to take away some of VMware's business. OpenStack, a global collaboration of companies (including IBM and Red Hat) focused on developing an open-source cloud platform, gained a lot of momentum in 2013. As an example, Ericsson recently signed on to use a version of OpenStack to run its telecommunications network, a deal estimated to be worth $30 million, according to the Wall Street Journal. Jason Hoffman, Ericsson's head of cloud systems and platforms, commented that this deal mostly replaces software from VMware.
So, while cloud computing is a huge opportunity for VMware and an area that's crucial for its growth, the competition is also intense. It is also possible that the change of focus from the virtualization layer up to the cloud layer will begin to take away from VMware's traditional business.
VMware saw great results last year, and it expects more of the same going forward. However, by its own admission, the competition also intensified in 2013 and will continue to do so this year. Because of the size and clout of many of its competitors, it's worth keeping an eye on VMware in the coming months to see whether it can manage these challenges and continue its growth.