Monday, January 1, 2007

VMware - risks and opportunities

Many newsletters, articles and advisors issue investment guidances based on the financial statements of a company and their future outlook. In this post, I'm going to focus only on the latter since the financial statement analysis is available from many investment websites (Note - You'll have to look at the financial statements of VMware's parent company - EMC).

The last couple of years have been extremely good for not just VMware but also many other VM vendors. VMware's greatest threat has been its own success - sensing a huge opportunity, companies both large and small have moved into the VM space. However, VMware still has first-mover advantage in many fields and may still be able to outmaneuver their competition.

Notable among VMware's competitors is XenSource, whose flagship product is based on an another University research project. XenSource has been slowly making inroads into the market and has a lot riding on the next release of Redhat's Enterprise Linux (v5) which will bundle Xen's VM environment ( Acknowledging the importance of the technology, the Linux community has decided to make the Linux KVM project ( part of the next mainstream kernel. And finally, Microsoft is giving away its product ( for free and will most likely support native virtualization in their Vista server product line in the near future. These tactics are bound to put tremendous pressure on VMware in 2007-08.

These developments are but natural - as technology matures and becomes a commodity, its value reduces and vendors have to move upstream. In a bid to move upstream, VMware has been focusing on building software and infrastructure that make the management of hundreds of thousands of VMs easy. They have also been toying with other ideas like the VMware appliance ( hoping to create new markets. To avoid being a roadkill, VMware has also started giving a fair amount of their software away for free. Are these measures enough to outmaneuver their competition? I remain cautiously optimistic that VMware will be able to overcome what might be the biggest challenge they have yet faced. Whether they come out with their flags flying high or barely alive from the looming attrition wars remains to be seen.

Bottomline - VMware's parent is EMC, an 800 pound gorilla with a market cap of $30 Billion and annual revenue close to $12 Billion. Large-cap stocks like EMC are known more for being steady movers than exciting growth prospects. Given that EMC's stock prices have been stagnant over the last couple of years and also the serious challenges facing VMware, I would not buy their stock. However, If I'd already bought into EMC, I'd hold them for a few more months.

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