VMware Could See 40% Upside on Shift to Virtualization

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VMware ( VMW ) competes with Microsoft ( MSFT ) and Citrix ( CTXS ) in the virtualization  market, which it leads with around 45% share globally. As server virtualization becomes increasingly popular and the benefits offered - less power consumption, space optimization, greater capacity utilization and cost effectiveness - become indispensable to businesses, VMware is likely to benefit going forward.

The percent of servers that have been virtualized has increased from around 5% in 2005 to around 14% currently led by  multiple benefits of virtualization in terms of ease of use and lower costs, greater interoperability in virtualization, and falling prices and improved functionality. These trends are going to benefit companies like VMware.

While we expect the percent of virtualized servers will continue increasing to 27%, the Trefis members expect a higher level of 40%, translating to an upside of 43% to our price estimate for VMware stock.

We currently have a Trefis price estimate of $89.24 for VMware's stock , which is about in line with the current stock price.

Benefits of Virtualization

VMware's server virtualization technology decouples the software from the underlying hardware, enables aggregation of multiple servers, storage infrastructure and networks into pools of resources that can be delivered dynamically, securely and reliably to applications as needed.

Demand for Interoperability Increasing

There are already a number of initiatives to make managing multiple Virtual Machine (VM) vendors easier. Novell's ZENworks VM Manager and Orchestrator products are just one of many products that will offer a way to manage more than one vendor's hypervisor, or virtual machine monitor ( VMM ).

Microsoft (with its System Center software), CA and others have announced plans to support both Microsoft's and VMware's hypervisors, while Novell will support Citrix's solution. The eventual goal of these standards is to provide hypervisor interoperability, such as by taking a VM image built on the Microsoft Hyper-V hypervisor and running it on a Citrix XenServer hypervisor without having to modify the VM's configuration.

Server Prices Falling, Functionality Improving

Most free products like Microsoft's Virtual Server line continue to be a great way for enterprises to become familiar with VM technology. VMware has introduced support for 10 Gigabit Ethernet (10GE) networks and larger memory and disk support with its latest version. Citrix has also boosted the performance of XenServer especially when it comes to XenServer working with the company's flagship Presentation Server product line.

Member Forecast

The Trefis community forecasts that Percent of Servers Virtualized will increase from 21% in 2011 to around 39% in the coming years, compared to the baseline Trefis estimate of an increase from about 16% to 28% during the same period. The member estimates imply an upside of 43% to the Trefis price estimate for VMware's stock.

Our complete analysis for VMware's stock is here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CTXS , MSFT , VMM , VMW

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